Globalization and Fiscal Federalism: Does Openness Constrain Subnational Budget Imbalances?

Recent research has shown that more globalized countries—defined as those with stronger international trade and financial linkages—tend to have larger governments. The empirical evidence reported in this paper shows that globalization is also associated with the government's fiscal stance, nationally and subnationally. Greater access to external sources of finance, which can be facilitated through globalization, is associated with increased market scrutiny over policies, resulting in a higher premium on fiscal discipline.