The Dynamic Effects of Fiscal Shocks in China

In this paper, we analyze the dynamic effects of fiscal shocks in China between 1990 and 2008. We adopt a Bayesian vector auto-regression framework. The main findings are as follows. First, government expenditure expansionary shocks are found to have positive effects on output. These effects become substantially weaker in the last 10 years. Second, the crowding out effects of government expenditure on consumption are found in the long-term other than in the short-term. Although the effects of government spending on prices are usually small and not always significant, they are positive. Third, tax revenues have negative effects on output, consumption, export and prices. The application of these results to the analysis of fiscal policy points to the conclusion that automatic stabilizers should play a more important role in China because the effect of an increase in spending or a cut in taxes would be multiplied by stimulating additional demand for consumption goods.