Estimating local fiscal multipliers using political connections

Rong Li () and Yijiang Zhou

China Economic Review, 2021, vol. 66, issue C

Abstract: We use political connections between central and local governments in China to identify the effects of government spending. Our key innovation is using changes of central government ministers as a source of exogenous variation in earmarked transfers received by prefectural city-level governments. The analysis reveals that the increase in earmarked transfers is temporary and local effective tax rates do not respond to such fiscal expansions. Given that using cross-regional analysis for a monetary union can difference out the influence of monetary policy, the fiscal shock we study is a temporary, non-tax financed and no-monetary-policy-response government spending shock. We find the local fiscal multiplier in China is above one and there are no significant spillover effects from local government spending.

Keywords: Local fiscal multiplier; Government spending; Political connection; Earmarked transfer (search for similar items in EconPapers)
JEL-codes: E62 H30 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:66:y:2021:i:c:s1043951x21000171

DOI: 10.1016/j.chieco.2021.101599

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