The Long Shadow of a Fiscal Expansion

43 Pages Posted: 7 Nov 2016

See all articles by Chong-En Bai

Chong-En Bai

Tsinghua University - School of Economics & Management

Chang-Tai Hsieh

University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Zheng Michael Song

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: November 2016

Abstract

In 2009 and 2010, China undertook a 4 trillion Yuan fiscal stimulus, roughly equivalent to 12 percent of annual GDP. The "fiscal" stimulus was largely financed by off-balance sheet companies (local financing vehicles) that borrowed and spent on behalf of local governments. The off-balance sheet financial institutions continued to grow after the stimulus program ended at the end of 2010. After the end of the stimulus program, spending by these off-balance sheet companies accounted for roughly 10% of GDP each year, with an increasing share used for what are essentially private commercial projects. The off-balance spending by local governments is likely responsible for a 5 percentage-point increase in the aggregate investment rate and part of the 7 to 8 percentage-point decline in current account surplus since 2008. Finally, we argue that local governments used their new access to financial resources to facilitate access to capital to favored private firms, which potentially worsens the overall efficiency of capital allocation. The long run effect of off-balance sheet spending by local governments may be a permanent decline in the growth rate of aggregate productivity and GDP.

Suggested Citation

Bai, Chong-En and Hsieh, Chang-Tai and Song, Zheng Michael, The Long Shadow of a Fiscal Expansion (November 2016). NBER Working Paper No. w22801. Available at SSRN: https://ssrn.com/abstract=2865537

Chong-En Bai (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Chang-Tai Hsieh

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zheng Michael Song

University of Chicago ( email )

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