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Fiscal Decentralization, Local Government Behavior, and Macroeconomic Effects of Environmental Policy

Author

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  • Shi Chen

    (School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China)

  • Xun Liu

    (School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
    Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu 611130, China)

  • Chong Lu

    (Research Institute of Social Development, Southwestern University of Finance and Economics, Chengdu 611130, China)

Abstract

With the rapid economic growth, environmental problems have become a significant bottleneck restricting the high-quality development of China’s economy. In the fiscal decentralization system, balancing economic growth and environmental governance is an issue that needs to be paid attention to in fiscal policy. This paper studies the impact of fiscal decentralization on the environmental policy in China. We incorporate the central and local government structure into a standard environmental dynamic stochastic general equilibrium (E-DSGE) model. The economy was featured with multiple-level governments where the local governments implement fiscal policies through the trade-off between pursuing economic growth and environmental governance. The results indicate that implementing a carbon emission tax is not conducive to economic growth but helps reduce environmental pollution. Second, deepening fiscal decentralization has heterogeneous effects on central and local fiscal expenditures. Deepening fiscal decentralization strengthens the positive externality of local government expenditures to output, but it also leads to further deterioration of environmental pollution. The positive externality of the central government expenditures will weaken with the increase in fiscal decentralization, but it is conducive to improving the quality of the environment. Third, deepening fiscal decentralization is conducive to improving social welfare and alleviating environmental pollution. If the local government fiscal expenditures are biased toward environmental governance expenditures, this is beneficial to improve social welfare and the quality of the environment.

Suggested Citation

  • Shi Chen & Xun Liu & Chong Lu, 2022. "Fiscal Decentralization, Local Government Behavior, and Macroeconomic Effects of Environmental Policy," Sustainability, MDPI, vol. 14(17), pages 1-18, September.
  • Handle: RePEc:gam:jsusta:v:14:y:2022:i:17:p:11069-:d:906951
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    Cited by:

    1. Zhijun Gu & Chaowei Tian & Zeyuan Zheng & Shujian Zhang, 2022. "Favorable Fiscal Self-Sufficiency Enables Local Governments to Better Improve the Environmental Governance—Evidence from China’s Lower-Pollution Areas," Sustainability, MDPI, vol. 14(23), pages 1-14, December.
    2. Zefeng Tang, 2022. "Local Government Debt, Financial Circle, and Sustainable Economic Development," Sustainability, MDPI, vol. 14(19), pages 1-29, September.
    3. Zhuoxi Yu & Yu Wu & Zhichuan Zhu, 2023. "Fiscal Decentralization, Environmental Regulation and High-Quality Economic Development," Sustainability, MDPI, vol. 15(10), pages 1-20, May.
    4. Hui Jin & Mihajlo Jakovljevic, 2023. "Fiscal Decentralization and the Human Development Index: A Cross-Border Empirical Study," Sustainability, MDPI, vol. 15(11), pages 1-16, May.

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