Government Size and Macroeconomic Stability: Sub-National Evidence from China

Cheng Li

MPRA Paper from University Library of Munich, Germany

Abstract: Both theoretical predictions of Keynesian view and a large body of empirical studies on developed countries suggest that business cycle fluctuations can be partially smoothed by counter-cyclical fiscal policies. Our paper extends this strand of literature by considering the nexus between output fluctuations and government size in the context of Chinese fiscal federalism. Using a sample of 29 Chinese provinces for the period of 1994-2007, we fail to provide consistent evidence for the stabilizing effect of fiscal policies. In particular, we find that under the tax assignment system (fen shui zhi), neither the central government’s fiscal transfers nor the provincial budgetary and extra-budgetary revenues help reduce economic volatility. Such results are shown to be robust across different model specifications, volatility measures and estimation techniques.

Keywords: business cycles; government size; fiscal federalism; China (search for similar items in EconPapers)
JEL-codes: E32 E62 H5 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dev, nep-mac, nep-pbe and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:28226

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