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Credit and Fiscal Multipliers in China

Sophia Chen (), Lev Ratnovski () and Pi-Han Tsai ()
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Pi-Han Tsai: Zhejiang University

No GRU_2019_005, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We estimate credit and fiscal multipliers in China, using subnational political cycles as a source of exogenous variation. The tenure of the provincial party secretary, interacted with the credit and fiscal expenditure used in other provinces, instruments for provincial credit and government expenditure growth. We find a fiscal multiplier of 0.75 in 2001-2008, which increased to 1.2 in 2010-2015, consistent with higher multipliers in a slower economy. At the same time, a credit multiplier of 0.2 in 2001-2008 declined to close to zero in 2010-2015, consistent with credit saturation and credit misallocation. Our results suggest that credit expansion cannot further support economic growth in China. The flip side is that lower credit growth is also unlikely to disrupt output growth. Fiscal policy is powerful, and can cushion the macroeconomic adjustment to lower credit intensity.

Keywords: Credit Growth; Fiscal Stimulus; Macroprudential Policy; Multipliers; China (search for similar items in EconPapers)
JEL-codes: E63 G21 H20 R12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-02-18
New Economics Papers: this item is included in nep-cna, nep-fdg, nep-mac and nep-tra
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https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232019-005%20Ratnovski.pdf (application/pdf)

Related works:
Working Paper: Credit and fiscal multipliers in China (2019) Downloads
Working Paper: Credit and Fiscal Multipliers in China (2017) Downloads
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