Effects of Proactive Fiscal Policy in the Context of Supply-Side Structural Reform: On the Choice of Anchors for Monetary Policy

Min Pan and Xinping Zhang
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Min Pan: Center for Economic Development Research (CEDR), Wuhan University, Wuhan 430072, China; Economics and Management School, Wuhan University, Wuhan 430072, China
Xinping Zhang: Economics and Management School, Wuhan University, Wuhan 430072, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2023, vol. 18, issue 3, 336-362

Abstract: By constructing a New Keynesian dynamic stochastic general equilibrium (DSGE) model that embeds structural fiscal policy and contains two types of households, labor intermediaries, manufacturers, the central bank, and fiscal departments, and based on China's macroeconomic controls that combine proactive fiscal policy with prudent monetary policy in the context of supply-side structural reform, this paper compares and analyzes the macroeconomic effects of the various types of proactive fiscal policy instruments, and measures the impact of the choice of anchors for monetary policy on the long-term welfare loss caused by the various fiscal policy instruments. This study finds that the consumption-oriented fiscal expenditure increase and labor income tax reduction policies have the most significant macroeconomic stimulus effects in the short term, but attention should be paid to the disadvantage that they may lead to the rise of government debt risks; and in the long term, the role of production-oriented fiscal expenditure policies in guaranteeing the stable operations of China's economy should be brought into play. In addition, once the implementation of proactive fiscal policy lasts for too long, their long-term effects may be weakened, with negative macroeconomic impacts. In order to mitigate the resulting long-term economic fluctuations and welfare loss, prudent monetary policy should be fine-tuned with price stability as the anchor.

Keywords: fiscal policy; monetary policy; choice of anchors; welfare loss (search for similar items in EconPapers)
Date: 2023
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