Empirical Research on Dynamic Effects of Fiscal Policy in China: 1998-2004

This paper makes some research on the dynamic effects of expansionary fiscal policy between 1998 and 2004 in China. Based on the nature of the data, we choose structural VECM model in our estimation. Here, both long run and short run restrictions are used to identify the fiscal shocks and then impulse response function and variance decomposition are used to describe the effects. Results show that government spending shocks have positive effects on output, while tax revenues have negative effects, which supports the traditional Keynesian effects. Also, the results give support to the effects of the expansionary fiscal policy since 1998: the effects are not as significant as expected, as the effects from government spending are partly counteracted by tax revenue.