Financial decentralization and local fiscal resilience under uncertainty: Evidence from China

Financial decentralization reshapes the allocation of financial resources across regions and may influence local fiscal system under heightened uncertainty. Using panel data for Chinese provinces from 2008 to 2023, this paper examines whether financial decentralization enhances fiscal resilience and investigates the underlying mechanisms. We find a significant positive relationship between financial decentralization and fiscal resilience. The results are robust to alternative specifications and a range of endogeneity tests. Mechanism evidence suggests that financial decentralization strengthens fiscal resilience by facilitating the development of non-state-owned enterprises and supporting consumer-market vitality, consistent with improved resource allocation efficiency and enhanced shock-absorption capacity. Fiscal decentralization further amplifies the effect of financial decentralization on fiscal resilience, and this moderating effect varies across the conditional distribution of fiscal resilience. Overall, our findings provide novel evidence on the real effects of financial decentralization on fiscal resilience and offer important implications for the design of decentralization arrangements in emerging economies facing elevated uncertainty.