Booms, Busts, and Bailouts: Fiscal Federalism and Subnational Credit

Excessive borrowing by local and regional governments is an important source of macroeconomic instability in monetary unions. Credit markets often indulge this behaviour (lending too much at excessively low interest rates) if they expect national officials to bail out struggling local jurisdictions. Drawing on cross-national and Canadian data, IMFG Post-Doctoral Fellow Kyle Hanniman discussed the role and limits of fiscal federal institutions in shaping these bailout beliefs.