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Reevaluation of Local Fiscal Multipliers in China

Author

Listed:
  • Ming Li
  • Degang Li

Abstract

The recent global financial crisis has renewed interest in the long-standing question of the size of fiscal multipliers. In this paper, we employ a peculiar feature of the allocation mechanism of China's intergovernmental transfers that triggers exogenous variations on local public spending: National Poor Counties (NPCs) designated by the central government enjoy preferential treatments in receiving central-local earmarked transfers. We construct an instrument variable to identify the multiplier. We find that the effects of local government spending on local output mainly concentrate on the non-tradable sector. We also find that local public expenditure has striking effects on stimulating investment but has negligible effects on in-county consumption. A puzzling feature of our results is that the estimated local fiscal multiplier is at the low-end of existing estimates.

Suggested Citation

  • Ming Li & Degang Li, 2021. "Reevaluation of Local Fiscal Multipliers in China," Journal of Management World, Academia Publishing Group, vol. 2021(1), pages 49-58.
    • Handle: RePEc:bjx:jomwor:v:2021:y:2021:i:1:p:49-58:id:140
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