Fiscal federalism and international capital: The effects of fiscal federalism on foreign direct investment and sovereign debt ratings

Although the study of federalism has become one of the most intensely studied areas in economics and political science, no consensus has emerged on the impact of fiscal federalism on macroeconomic performance. I focus on one specific element of the debate-the role of fiscally federal institutions in allowing a country access to international capital markets. In an empirical analysis of 60 countries from 1975-1995 I find fiscal federalism has no clear impact on inflows of foreign direct investment. In an examination of the impact of federalism on sovereign debt ratings for 40 countries from 19801998, I find that fiscal federalism is associated with lower levels of sovereign debt risk.