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Fiscal Decentralization and Fiscal Multiplier in China

Fei Guo () and Isabel Kit-Ming Yan ()
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Fei Guo: Xian Jiaotong University
Isabel Kit-Ming Yan: City University of Hong Kong

No GRU_2021_026, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: A fundamental aspect of China's transition to a market economy is the change of 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 decreased the aggregate and provincial spending multipliers. The 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)
Pages: 32 pages
Date: 2021-05-31
New Economics Papers: this item is included in nep-cna, nep-mac and nep-ure
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