Fiscal Decentralization, Local Government Behavior, and Macroeconomic Effects of Environmental Policy

Shi Chen, Xun Liu and Chong Lu ()
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Shi Chen: School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
Xun Liu: School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
Chong Lu: Research Institute of Social Development, Southwestern University of Finance and Economics, Chengdu 611130, China

Sustainability, 2022, vol. 14, issue 17, 1-18

Abstract: With the rapid economic growth, environmental problems have become a significant bottleneck restricting the high-quality development of China’s economy. In the fiscal decentralization system, balancing economic growth and environmental governance is an issue that needs to be paid attention to in fiscal policy. This paper studies the impact of fiscal decentralization on the environmental policy in China. We incorporate the central and local government structure into a standard environmental dynamic stochastic general equilibrium (E-DSGE) model. The economy was featured with multiple-level governments where the local governments implement fiscal policies through the trade-off between pursuing economic growth and environmental governance. The results indicate that implementing a carbon emission tax is not conducive to economic growth but helps reduce environmental pollution. Second, deepening fiscal decentralization has heterogeneous effects on central and local fiscal expenditures. Deepening fiscal decentralization strengthens the positive externality of local government expenditures to output, but it also leads to further deterioration of environmental pollution. The positive externality of the central government expenditures will weaken with the increase in fiscal decentralization, but it is conducive to improving the quality of the environment. Third, deepening fiscal decentralization is conducive to improving social welfare and alleviating environmental pollution. If the local government fiscal expenditures are biased toward environmental governance expenditures, this is beneficial to improve social welfare and the quality of the environment.

Keywords: fiscal decentralization; environmental policy; E-DSGE model; local government behavior; policy evaluation and design (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:14:y:2022:i:17:p:11069-:d:906951

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