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Fiscal multipliers, sectoral heterogeneity and reallocation in China

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  • He, Ying
  • Yu, Changhua

Abstract

This paper investigates the impact of sectoral heterogeneity on fiscal multipliers in China, focusing on resource reallocation between the capital-intensive heavy sector and the labor-intensive light sector. By applying a Bayesian SVAR model to identify fiscal spending shocks over 1992Q1–2015Q3, we find an aggregate output multiplier of 0.76, with output multipliers of 1.09 for the heavy sector and − 0.25 for the light sector. Fiscal spending shocks lead to rising labor costs, declining capital costs, and the disappearance of light-sector firms—all driven by factor reallocation. Our two-sector model with heterogeneous producers and financial frictions explains these dynamics, highlighting the role of fiscal policy in reshaping sectoral outputs.

Suggested Citation

  • He, Ying & Yu, Changhua, 2025. "Fiscal multipliers, sectoral heterogeneity and reallocation in China," China Economic Review, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:chieco:v:93:y:2025:i:c:s1043951x25001142
    DOI: 10.1016/j.chieco.2025.102456
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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