Credit and Fiscal Multipliers in China

33 Pages Posted: 4 Mar 2019

See all articles by Sophia Chen

Sophia Chen

International Monetary Fund (IMF) - Research Department

Lev Ratnovski

International Monetary Fund; European Central Bank, Financial Research Division

Pi-Han Tsai

Zhejiang University - College of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2019

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, China, macroprudential policy, multipliers

JEL Classification: E63, G21, H20, R12

Suggested Citation

Chen, Sophia and Ratnovski, Lev and Tsai, Pi-Han, Credit and Fiscal Multipliers in China (February 28, 2019). BOFIT Discussion Paper No. 5/2019, Available at SSRN: https://ssrn.com/abstract=3345433

Sophia Chen (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Lev Ratnovski

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://ratnovski.googlepages.com

European Central Bank, Financial Research Division

Germany

Pi-Han Tsai

Zhejiang University - College of Economics ( email )

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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