On The Evolution of Fiscal Federalism: Theory and Institutions

In this paper, I want to review this evolution of the theory of fiscal federalism and offer some thoughts on the implications of these new views for the structure and functioning of federal fiscal systems. This will provide an opportunity to draw on the comparative experience of certain countries, an experience that provides some valuable lessons for intergovernmental fiscal behavior. This will also provide a context for a re–examination of one of the basic instruments of federal finance: intergovernmental grants. These grants have, in principle, a basic role to play in fiscal federalism, but, as the literature has made clear, they have been the source of some serious malfunction in federal fiscal systems. Finally, I want to explore briefly the development and spread of some relatively recent fiscal institutions (such as "rainy–day funds") that have helped to improve the performance of state and local governments.