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Government Size and Macroeconomic Stability: Sub-National Evidence from China

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  • Li, Cheng
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Abstract

Both theoretical predictions of Keynesian view and a large body of empirical studies on developed countries suggest that business cycle fluctuations can be partially smoothed by counter-cyclical fiscal policies. Our paper extends this strand of literature by considering the nexus between output fluctuations and government size in the context of Chinese fiscal federalism. Using a sample of 29 Chinese provinces for the period of 1994-2007, we fail to provide consistent evidence for the stabilizing effect of fiscal policies. In particular, we find that under the tax assignment system (fen shui zhi), neither the central government’s fiscal transfers nor the provincial budgetary and extra-budgetary revenues help reduce economic volatility. Such results are shown to be robust across different model specifications, volatility measures and estimation techniques.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28226.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:28226

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Keywords: business cycles; government size; fiscal federalism; China;

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  1. Adeel Malik & Jonathan R W Temple, 2005. "The Geography of Output Volatility," CSAE Working Paper Series 2005-07, Centre for the Study of African Economies, University of Oxford.
  2. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January.
  3. Gong, Gang & Lin, Justin Yifu, 2008. "Deflationary expansion: An overshooting perspective to the recent business cycle in China," China Economic Review, Elsevier, vol. 19(1), pages 1-17, March.
  4. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  5. Zhang, Yin & Wan, Guanghua, 2004. "China's Business Cycles: Perspectives from an AD-AS Model," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Andrés, Javier & Doménech, Rafael & Fatás, Antonio, 2004. "The Stabilizing Role of Government Size," CEPR Discussion Papers 4384, C.E.P.R. Discussion Papers.
  7. Stefan E. Oppers, 1997. "Macroeconomic Cycles in China," IMF Working Papers 97/135, International Monetary Fund.
  8. Xavier Debrun & Jean Pisani-Ferry & André Sapir, 2008. "Government size and output volatility: should we forsake automatic stabilisation?," Working Papers, Bruegel 47, Bruegel.
  9. Jean Pisani-Ferry & Xavier Debrun & André Sapir, 2008. "Government Size and Output Volatility," IMF Working Papers 08/122, International Monetary Fund.
  10. Tao Zhang & Heng-fu Zou, 2001. "Fiscal decentralization, public spending, and economic growth in China," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 58, China Economics and Management Academy, Central University of Finance and Economics.
  11. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
  12. Loren Brandt & Xiaodong Zhu, 2000. "Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(2), pages 422-451, April.
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