Fiscal Decentralization and Intergovernmental Debt Management

This paper investigates how government debt is allocated between the central government and local governments among countries with various type of decentralization. For example, in Euro area, the Stability and Growth Pact provides convergence criteria on gross government debt (lower than 60% of GDP or approaching that value). Member countries decide allocation of the gross government debt between the central (federal) government and local (state) governments to achieve the criteria. On the other hand, local (state) governments do not directly accept responsibility to attain the criteria of government debt. Depending on fiscal decentralization, the central and local governments cannot cooperate to restrain government debt, because they pursue their ends independently. We analyze theoretically and numerically intergovernmental structure and debt management of the central and local governments. We develop a theoretical model of intergovernmental financing with government debt and public investment, and explain allocation of government debt between the central and local governments in a multi-government setting.