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Polycentric Governance and the Theory of Budget Constraints: Do the Conditions of Money and Credit Compromise the Compound Republic?

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Type: Conference Paper
Author: Kravchuk, Robert S.
Conference: Workshop on the Ostrom Workshop 6
Location: Indiana University, Bloomington
Conf. Date: June 19-21, 2019
Date: 2019
URI: https://hdl.handle.net/10535/10463
Sector: General & Multiple Resources
Subject(s): polycentricity
Abstract: "I address whether polycentric governance can survive the implicit threat posed by a monetarily-sovereign federal government. The question turns on whether, and when, 'hard- and soft-budget constraints' apply to a given government’s finances. The limits to government spending are argued to be a function of a government’s access to money and credit. Drawing on the work of Kornai (1992), McKinnon (1992, 1997), Vickrey (1996), Wray (2011), Mosler (2009) and Weingast (1995), “soft” budget constraints embody direct and indirect means of financing expenditure (i.e., “backdoor”, off-budget, or shift-able expenditures and/or risk). Monetarily sovereign central governments have clear advantages in their ownership of a central bank, which has the ability to create money at will, and their ability to issue debt denominated in the their own fiat-credit money. Central governments thus face 'ultra-soft' budget constraints, having no effective limit to their ability to issue money, credit, and debt. States and localities face budget constraints similar to those of households and firms. Central governments, even in a strong federal or polycentric systems of governance, are predicted to become the dominant players. The current institutional structure of the compound republic may have no effective checks with which to balance incursions of monetarily-sovereign federal governments."

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