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Credit and fiscal multipliers in China: Evidence from a political economy based estimation

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  • Chen, Sophia
  • Ratnovski, Lev
  • Tsai, Pi-Han

Abstract

We use subnational political cycles as a source of exogenous variation in fiscal and credit policies to jointly estimate the output multipliers of fiscal expenditure and of credit expansion in China. The tenure of the provincial party secretary, interacted with the growth of on-budget fiscal expenditure or credit in peer provinces, instruments for provincial fiscal expenditure and credit. We estimate an on-budget fiscal multiplier of 1.0 and a credit multiplier of 0.2 during 2000–2019. The credit multiplier has decreased since the Global Financial Crisis. Fiscal expenditure has the strongest effect on manufacturing, whereas credit growth has the strongest effect on construction.

Suggested Citation

  • Chen, Sophia & Ratnovski, Lev & Tsai, Pi-Han, 2021. "Credit and fiscal multipliers in China: Evidence from a political economy based estimation," Journal of International Money and Finance, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jimfin:v:119:y:2021:i:c:s0261560621001327
    DOI: 10.1016/j.jimonfin.2021.102481
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    More about this item

    Keywords

    Credit Growth; Credit Policy; Fiscal Stimulus; Multiplier; China;
    All these keywords.

    JEL classification:

    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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