This study aims to examine whether decentralization causes regional economic growth for the states of Mexico in the period 1998–2016. We employ Granger causality tests and a Panel data Vector Autoregression model to account for the dynamics of fiscal federalism and endogeneity of federal transfers and economic growth. Impulse responses and variance decomposition are also employed to examine the time path of economic growth after unitary fiscal shocks from transfers. Among the results, we find federal transfers positively affect economic growth. The slim response of growth and its puzzling response to investment shocks possibly signal a soft budget problem.