FISCAL FEDERALISM AND PUBLIC DEBT FISCAL INSTABILITY DUE TO MULTI LEVEL BORROWING IN A MODEL OF NEOCLASSICAL GROWTH

neoclassical growth model with constant saving rates, publicly provided services and public debt is used to analyse the impact of a federal structure. The main focus is on the existence and the stability of steady states. It is shown that the equilibrium in a federation with publicly provided services is more likely to be unstable than the equilibrium with public capital as a substitute. Moreover, only dynamic inefficient solutions are stable. Due to additional instability, the need for flexible vertical assignment of public functions is further stressed.