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Fiscal Decentralization and Fiscal Multiplier in China

Guo Fei (), Opoku Eric Evans Osei, Kate Hynes and Yan Isabel Kit-Ming
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Guo Fei: School of Economics and Management, Ningxia University, No. 489, Helanshan West Road, Yinchuan, 750021, China
Opoku Eric Evans Osei: Nottingham University Business School China, University of Nottingham – Ningbo China, 199 Taikang East Road, Ningbo, Zhejiang, 315100, China
Yan Isabel Kit-Ming: Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Ave, Kowloon, Hong Kong

The B.E. Journal of Macroeconomics, 2022, vol. 22, issue 2, 729-763

Abstract: A fundamental aspect of China’s transition to a market economy is the change in 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 significantly decreased the provincial spending multiplier, while its effect on the aggregate spending multiplier is insignificant. The provincial 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.

Keywords: fiscal decentralization; government spending; fiscal multiplier; tax reform; China (search for similar items in EconPapers)
JEL-codes: E62 H5 H72 R5 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejm-2020-0275

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