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How Public Expenditure and Bank Credit Affect Growth: Provincial and Enterprise Level Causal Evidence from China's 2008 Wenchuan Earthquake

Author

Listed:
  • Dongmin Yao

    (Center for China Fiscal Development, Central University of Finance and Economics)

  • Yijing Chen

    (Center for China Fiscal Development, Central University of Finance and Economics)

  • Yixuan Xu

    (School of Economics, Renmin University)

Abstract

The main difficulty in estimating the casual relationship between public expenditure, bank credit and economic growth is the two-way causality, omitted variable bias and other endogenous problems. The main findings are that in China's macro environment, the causal relationship between public expenditure and economic growth is aligned with the Keynesian hypothesis—GDP increases with an increase in public expenditure. Similarly, when bank credit is exogenous, increasing it can significantly increase GDP, whereas increasing public expenditure expands bank credit. Both fiscal and monetary policies are effective macro-control tools, and institutional innovation is needed to build synergy between them.

Suggested Citation

  • Dongmin Yao & Yijing Chen & Yixuan Xu, 2021. "How Public Expenditure and Bank Credit Affect Growth: Provincial and Enterprise Level Causal Evidence from China's 2008 Wenchuan Earthquake," Annals of Economics and Finance, Society for AEF, vol. 22(1), pages 195-231, May.
    • Handle: RePEc:cuf:journl:y:2021:v:22:i:1:yaochenxu
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    References listed on IDEAS

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    More about this item

    Keywords

    Public expenditure; Bank credit; Economic growth; Causal inference;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • N00 - Economic History - - General - - - General

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