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Macroeconomic Effects of Government Spending in China

Author

Listed:
  • Wang, Xin
  • Wen, Yi

    () (Federal Reserve Bank of St. Louis)

Abstract

Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analyzed in this paper. We show that government spending in China (i) Granger-causes output, consumption and investment booms as well as inflation and (ii) has a multiplier larger than 1. The large multiplier effects are found not only in aggregate time-series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large multiplier found in China but also suggests that government spending is not necessarily a free lunch in spite of the large multiplier effects.

Suggested Citation

  • Wang, Xin & Wen, Yi, 2013. "Macroeconomic Effects of Government Spending in China," Working Papers 2013-013, Federal Reserve Bank of St. Louis, revised 13 Aug 2017.
  • Handle: RePEc:fip:fedlwp:2013-013
    DOI: 10.20955/wp.2013.013
    Note: Previously titled as "Is government spending a free lunch? -- evidence from China"
    as

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    File URL: https://doi.org/10.20955/wp.2013.013
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    References listed on IDEAS

    as
    1. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
    2. Yongheng Deng & Randall Morck & Jing Wu & Bernard Yeung, 2011. "Monetary and Fiscal Stimuli, Ownership Structure, and China's Housing Market," NBER Working Papers 16871, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Guo, Shen & Liu, Lezheng & Zhao, Yan, 2015. "The business cycle implications of land financing in China," Economic Modelling, Elsevier, vol. 46(C), pages 225-237.
    2. Burdekin, Richard C.K. & Weidenmier, Marc D., 2015. "Assessing the impact of the Chinese stimulus package at home and abroad: A damp squib?," China Economic Review, Elsevier, vol. 33(C), pages 137-162.

    More about this item

    Keywords

    Government Spending; Fiscal Multiplier; Economic Development; Chinese Economy; Inflationary Finance;

    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
    • H00 - Public Economics - - General - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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