Fiscal Decentralization and Economic Growth: A Test for Granger Causality

Abstract

This paper tests the existence and the direction of causality between fiscal decentralization and economic growth. The previous literature has implicitly assumed that decentralization causes economic growth, and has largely ignored the possibility that economic growth can cause fiscal decentralization as well. This paper applies the Granger-causality test to panel data from 21 countries between 1975 and 1995, and finds that fiscal decentralization does not cause economic growth, but that economic growth causes fiscal decentralization.