How Can a Country 'Graduate' from Procyclical Fiscal Policy? Evidence from China

43 Pages Posted: 30 Sep 2015

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

In this study, we analyze the cyclicality of fiscal policies in China during the period 1978-2013. We find that the cyclicality of local government spending in China significantly affects the cyclicality of total government spending. By employing both time-series and province-level panel data, we show that local budgetary government spending was strongly procyclical during the 1980s, but it became counter-cyclical with respect to nationwide output fluctuations and acyclical with respect to region-specific output shocks since the mid-1990s. We argue that these are likely to be consequences of the 1994 fiscal reform, which revamped the fiscal relations between the central and local governments, reduced the procyclicality of local government budgetary revenue and brought in counter-cyclical intergovernmental transfers. Findings of this study contribute to the debate on how developing and emerging countries, in particular those with federal fiscal structures, could reduce the procyclicality of their fiscal policies.

Keywords: Fiscal federalism, tax reform , government spending

JEL Classification: H71, H72, H77

Suggested Citation

Fuest, Clemens and Xing, Jing, How Can a Country 'Graduate' from Procyclical Fiscal Policy? Evidence from China (September 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-068. Available at SSRN: https://ssrn.com/abstract=2666589 or http://dx.doi.org/10.2139/ssrn.2666589

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Jing Xing

Antai College of Economics & Management, Shanghai Jiao Tong University ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
86 21 52301040 (Phone)

HOME PAGE: http://www.acem.sjtu.edu.cn/en/faculty/xingjing.html

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