How Public Expenditure and Bank Credit Affect Growth: Provincial and Enterprise Level Causal Evidence from China's 2008 Wenchuan Earthquake

Dongmin Yao, Yijing Chen and Yixuan Xu ()
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Dongmin Yao: Center for China Fiscal Development, Central University of Finance and Economics
Yijing Chen: Center for China Fiscal Development, Central University of Finance and Economics
Yixuan Xu: School of Economics, Renmin University

Annals of Economics and Finance, 2021, vol. 22, issue 1, 195-231

Abstract: The main difficulty in estimating the casual relationship between public expenditure, bank credit and economic growth is the two-way causality, omitted variable bias and other endogenous problems. The main findings are that in China's macro environment, the causal relationship between public expenditure and economic growth is aligned with the Keynesian hypothesis—GDP increases with an increase in public expenditure. Similarly, when bank credit is exogenous, increasing it can significantly increase GDP, whereas increasing public expenditure expands bank credit. Both fiscal and monetary policies are effective macro-control tools, and institutional innovation is needed to build synergy between them.

Keywords: Public expenditure; Bank credit; Economic growth; Causal inference (search for similar items in EconPapers)
JEL-codes: C19 E63 N00 (search for similar items in EconPapers)
Date: 2021
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