Fiscal Decentralization and Fiscal Multiplier in China

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Article number0275
Journal / PublicationB.E. Journal of Macroeconomics
Online published18 Nov 2021
Publication statusOnline published - 18 Nov 2021

Abstract

A fundamental aspect of China's transition to a market economy is the change in fiscal decentralization marked by the tax reform in 1993. This paper examines the effect of revenue and expenditure decentralization and their divergences on fiscal spending multipliers in China using nationally aggregate and provincial-level data from 1978 to 2017. Our investigations show that expenditure decentralization weakens the efficacy of spending policies, while revenue decentralization enhances the efficacy. Moreover, the divergence of revenue and expenditure decentralization has significantly decreased the provincial spending multiplier, while its effect on the aggregate spending multiplier is insignificant. The provincial results are robust to the inclusion of off-budgetary expenditure and revenue, using different estimates of multipliers and different measures of fiscal decentralization, considering from a long-run perspective, and addressing the endogeneity issue.

Research Area(s)

  • China, fiscal decentralization, fiscal multiplier, government spending, tax reform