Fiscal Federalism in the Twenty-First Century

Fiscal federalism concerns the division of policy responsibilities amongdifferent levels of government. Many current economic and policy developments, such as globalization, environmental crises, and rising inequality,may not appear to be favorable to fiscal federalism, yet countries are furtherdecentralizing their fiscal systems. We summarize the efficiency and equityaspects of fiscal decentralization, fiscal competition, fiscal externalities, andintergovernmental grants. The review introduces readers to theoretical rea-sons for/against a federalist structure. We discuss how federalism relates toclassic problems in economics: externalities, inequality, spillovers, informa-tion, and aspects of political economy. Our review integrates both theory andempirics, while also focusing on the variety of federal systems in differentcountries, both developing and developed. We conclude by discussing howfiscal federalism is being shaped by economic, technological, and environ-mental changes, while discussing the effects of globalization, polarization,and global crises on the future of federal systems.