Market-preseving fiscal federalism: a computable general equilibrium analysis for Brazil

Abstract

The purpose of a federal system is to provide a stable political decentralization structure. In
Brazil, on the other hand, there has been sequential periods of fiscal decentralization and
centralization with impacts on the economic performance. The most recent literature predicts
problems of incentives for governments in both movements. Thus, this paper aims to test
empirically the validity of the main market-preserving federalism proposition (MPF), which is: more tax autonomy to regional governments, disciplined by imposing hard budget constraint
and interregional factor mobility, raises de economic gains. For this, some experiments were
carried out in a computable general equilibrium model seeking to simulate the different intensities
of these MPF characteristics. In general, the results confirm that the Brazilian economy
improves its performance (increases in GDP and welfare). However, at regional level and in
some situations, there is an increase in inequalities.