How Large Will Be the Effect of China's Fiscal-Stimulus Package on Output and Employment?
This paper studies the effects of the fiscal-stimulus package in Mainland China on its output and employment. Using the input-output table as the analytical framework, we argue that the aggregate effect on output and employment of a given amount of fiscal spending depends on the distribution of such spending across different economic sectors. We estimate that the announced fiscal spending of RMB2 trillion yuan in 2009 could lead to a direct increase in output of RMB1.7 trillion yuan, implying a fiscal multiplier of around 0.84 in the short-run, and could potentially generate 18 million to 20 million new jobs in non-farming sectors. We further argue that the size of the fiscal multiplier also depends on the cyclical conditions of the economy and the policy environment, which we simulate using a dynamic structural model. Model results show that the fiscal multiplier in the medium run is around 1.1 as government fiscal spending leads to higher household consumption and corporate investment, which will take time to fully materialise.
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