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Fiscal Decentralization and Fiscal Multiplier in China

Author

Listed:
  • Fei Guo

    (Xian Jiaotong University)

  • Isabel Kit-Ming Yan

    (City University of Hong Kong)

Abstract

A fundamental aspect of China's transition to a market economy is the change of fiscal decentralization marked by the tax reform in 1993. This paper examines the effect of revenue and expenditure decentralization and their divergences on fiscal spending multipliers in China using nationally aggregate and provincial-level data from 1978 to 2017. Our investigations show that expenditure decentralization weakens the efficacy of spending policies, while revenue decentralization enhances the efficacy. Moreover, the divergence of revenue and expenditure decentralization has decreased the aggregate and provincial spending multipliers. The results are robust to the inclusion of off-budgetary expenditure and revenue, using different estimates of multipliers and different measures of fiscal decentralization, considering from a long-run perspective, and addressing the endogeneity issue.

Suggested Citation

  • Fei Guo & Isabel Kit-Ming Yan, 2021. "Fiscal Decentralization and Fiscal Multiplier in China," GRU Working Paper Series GRU_2021_026, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2021_026
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232021-026%20Yan.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal decentralization; Government spending; Fiscal multiplier; Tax reform; China;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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