How can a country graduate from procyclical fiscal policy? : evidence from China

Preview

PDF
dp15068.pdf - Published
Download (476kB)

URL:	https://ub-madoc.bib.uni-mannheim.de/39819
URN:	urn:nbn:de:bsz:180-madoc-398192
Document Type:	Working paper
Year of publication:	2015
The title of a journal, publication series:	ZEW Discussion Papers
Volume:	15-068
Place of publication:	Mannheim
Publication language:	English
Institution:	Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series:	Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject:	330 Economics
Classification:	JEL: H71 , H72 , H77,
Keywords (English):	Fiscal federalism , tax reform , government spending
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.