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Increased Exposure of China to Asymmetric External Shocks: Is Fiscal Federalism an Efficient Answer?

  • Jean-François BRUN

    ()

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

  • Jean-Louis COMBES

    ()

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

  • Pascale COMBES MOTEL

    ()

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

  • Mary-Françoise RENARD

    ()

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

The aim of this paper is to examine whether there is a co-insurance mechanism against provincial aggregate income fluctuations between the Chinese provinces. Our theoretical argument relies on the existence of an efficient allocation of risk between the Chinese provinces. According to this analysis, an institutional arrangement between the provinces allows the perfect smoothing of provincial private consumption. In this case, changes in provincial private consumption depend rather on changes in aggregate Chinese income than on asymmetric changes in provincial income. We test this hypothesis on the 1989-2000 period for 30 Chinese provinces using the GMM estimator. Econometric evidence highlights the weakness of co-insurance mechanisms between the Chinese provinces. First, we reject the hypothesis of perfect insurance. Second, there does not seem to exist a significant, though imperfect, insurance mechanism. Indeed, the provinces’ private consumption reactions are the same either after a shock affecting all the provinces or after an asymmetric shock.

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Paper provided by CERDI in its series Working Papers with number 200217.

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Length: 18
Date of creation: 2002
Date of revision:
Handle: RePEc:cdi:wpaper:182
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