How Do Subnational Governments React to Shocks to Different Revenue Sources? Evidence from Hydrocarbon-Producing Provinces in Argentina

Based on the fiscal regime that prevailed in Argentina from 1988 to 2003, we estimate the effects of changes in intergovernmental transfers and hydrocarbon royalties on provincial public consumption and debt. Whenever intergovernmental transfers increase, all provinces primarily increase public consumption and, to a lesser extent, decrease their debt. However, when hydrocarbon-producing provinces experienced an increase in royalties, they saved the entire increase. We provide evidence that the exhaustible nature of royalties may explain this saving reaction in hydrocarbon-producing provinces.