IMPACT OF FISCAL DECENTRALIZATION ON PRICE STABILITY IN THE EUROPEAN COUNTRIES

Abstract

In this paper we examine the current state of knowledge in fiscal federalism literature on the relationship between fiscal decentralization and inflation and we conduct empirical research of the impact on decentralization on inflation rate in European countries. We estimate linear equation model using a panel data-set of 28 European countries over the period of 1972-2013. We also divide the whole sample in two subsamples: (1) Eurozone members until 2008: Austria, Belgium, Germany, Spain, Finland, France, Greece, Ireland, Italy, Luxemburg, Portugal, Netherland, over the period 1979-2013; and (2) SEE countries non-euro zone members: Bulgaria, Czech Republic, Croatia, Hungary, Lithuania, Poland, Romania, over the period of 1996-2012. Additionally we have examined the influence of government revenues, budget deficits, economic developmentand openness of the country on price stability. In this paper, we find evidence that the fiscal decentralization has significant negative impact on inflation rate in European countries. For SEE countries we show that when decentralization is increasing from relatively low to medium level, it has positive impact on price stability, but after reaching the certain „optimal“ degree of fiscal decentralization, further increasing of decentralization starts to have negative impact on price stability.