Counter Cyclical Transfer for Infrastructure – A Framework for Fiscal Policy Coordination and Economic Stability

31 Pages Posted: 2 Dec 2011

See all articles by Yilin Hou

Yilin Hou

Maxwell School, Syracuse University

Date Written: November 13, 2011

Abstract

This article examines the theory behind the design of fiscal transfers; it identifies acyclicality of transfers as a drawback and proposes counter cyclical design as an optimal fiscal framework to mitigate cyclical economic fluctuations. It further advocates counter-cyclical transfers for infrastructure investment, service maintenance, and business tax relief as incentives for states to save in boom years then build from recession into recovery. The framework is set to operate on time consistent policy rules, as automatic stabilizers with triggers from key economic indicators. It advocates dynamic equity to compensate boom-year donor states during recession for more effective macroeconomic stabilization. This article focuses on fiscal policy, does not discuss the political dynamics or details in implementation.

Keywords: fiscal policy, fiscal transfer, economic stability, infrastructure investment, policy coordination

JEL Classification: H50, H54, H70, H77

Suggested Citation

Hou, Yilin, Counter Cyclical Transfer for Infrastructure – A Framework for Fiscal Policy Coordination and Economic Stability (November 13, 2011). Available at SSRN: https://ssrn.com/abstract=1967621 or http://dx.doi.org/10.2139/ssrn.1967621

Yilin Hou (Contact Author)

Maxwell School, Syracuse University ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-3114 (Phone)

HOME PAGE: http://www.maxwell.syr.edu/pa/cpr/Hou,_Yilin/

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