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Estimating tax and government spending multipliers in China

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  • Yanwei Gu
  • Pinjie Lyu

Abstract

In recent years, China has implemented unprecedented fiscal policies, prompting crucial questions: are tax cuts effective in stimulating output and is the output effect from tax cuts greater than government spending in developing countries? This article addresses this ambiguity by providing a novel method to identify China’s tax and government spending shocks in a SVAR framework. The results show that both tax cuts and increased government spending positively impact output. The estimated tax multiplier is 2.4 (3.6) after 8 (20) quarters while the government spending multipliers are 0.3 (0.8), suggesting that tax cuts have a greater impact on output than government spending. The results above survive after a set of robustness checks. The findings contribute to the ongoing debate on the effectiveness of fiscal policy tools in developing economies and suggest that targeted tax measures could be a potent instrument for stimulating economic activity.

Suggested Citation

  • Yanwei Gu & Pinjie Lyu, 2024. "Estimating tax and government spending multipliers in China," Applied Economics, Taylor & Francis Journals, vol. 56(59), pages 8934-8950, December.
    • Handle: RePEc:taf:applec:v:56:y:2024:i:59:p:8934-8950
    DOI: 10.1080/00036846.2023.2295306
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