Faster Fiscal Stimulus and a Higher Government Spending Multiplier in China: Mixed-Frequency Identification With SVAR

Abstract

Motivating with two scenarios in which the government spending in China timely reacted to output shock within a quarter, this letter points out a downward bias in the estimation of Chinese government spending multiplier using the classical lag restriction for shock identification in a quarterly SVAR framework à la Blanchard and Perotti (2002). By relaxing the lag-length restriction from one quarter to one month, we propose a mixed-frequency identification (MFI) strategy by taking the unexpected spending change in the first month of each quarter as an instrument. The estimation results show that the Chinese government significantly reacts to output shock counter-cyclically within a quarter, with the resulting government spending multiplier being 0.546 on impact and 1.849 at the maximum. A comparison study confirms that results based on the identification strategy of Blanchard and Perotti (2002) suffer severe downward bias in such a case.

Keywords: government spending multiplier, inside lag, mixed-frequency identification, SVAR model

JEL Classification: C32, C36, E23, E62