Fiscal Decentralization and Cyclicality in Latin America

Using a newly constructed database of highly granular regional-level budgets, this paper documents the growing relevance of regional governments in Latin America over the past three decades and evaluates the implications for fiscal cyclicality. We find that regional governments exhibit lower revenue elasticity to national GDP than central governments, primarily due to the limited cyclicality of transfers. On the expenditure side, while overall elasticity is comparable to central governments, fiscal adjustment occurs through capital expenditures. We also show that transfers appear to operate primarily as redistribution mechanisms across regions rather than as instruments to offset differences in tax capacity.