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How large is the local fiscal multiplier? Evidence from Chinese counties

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  • Guo, Qingwang
  • Liu, Chang
  • Ma, Guangrong

Abstract

The paper estimates local fiscal multipliers using annual data for 1800 China counties. The identification exploits a peculiar feature of the allocation mechanism of China's intergovernmental transfers that triggers exogenous variations on local public spending. When aggregate central-local transfers go up at the national level, National Poor Counties can receive a disproportionate amount of transfers. We therefore construct an instrument that captures this heterogeneity in the response of local public spending to national central-local transfers. The analysis points to local fiscal multipliers of approximately 0.6, which is much lower than the estimates in most previous studies. The effects of local public spending are concentrated on non-tradable industries. Finally, we find local public spending has striking effects on stimulating in-county investment, but has negligible effects on stimulating in-county consumption.

Suggested Citation

  • Guo, Qingwang & Liu, Chang & Ma, Guangrong, 2016. "How large is the local fiscal multiplier? Evidence from Chinese counties," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 343-352.
    • Handle: RePEc:eee:jcecon:v:44:y:2016:i:2:p:343-352
    DOI: 10.1016/j.jce.2015.06.002
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    2. Zhang, Wen, 2020. "Political incentives and local government spending multiplier: Evidence for Chinese provinces (1978–2016)," Economic Modelling, Elsevier, vol. 87(C), pages 59-71.
    3. Chen, Sophia & Ratnovski, Lev & Tsai, Pi-Han, 2019. "Credit and fiscal multipliers in China," BOFIT Discussion Papers 5/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
    4. Li, Rong & Zhou, Yijiang, 2021. "Estimating local fiscal multipliers using political connections," China Economic Review, Elsevier, vol. 66(C).
    5. Kameda, Taisuke & Namba, Ryoichi & Tsuruga, Takayuki, 2021. "Decomposing local fiscal multipliers: Evidence from Japan," Japan and the World Economy, Elsevier, vol. 57(C).
    6. Mr. Lev Ratnovski & Sophia Chen & Pi-Han Tsai, 2017. "Credit and Fiscal Multipliers in China," IMF Working Papers 2017/273, International Monetary Fund.
    7. Imai, Masami, 2022. "Local economic impacts of legislative malapportionment," Journal of Urban Economics, Elsevier, vol. 131(C).
    8. Raouf, Mariam & Kassim, Yumna & Kurdi, Sikandra & Mogues, Tewodaj & Mahmoud, Mai & Randriamamonjy, Josée & Thurlow, James & Wiebelt, Manfred & Breisinger, Clemens, 2018. "The (Arab) Agricultural Investment for Development Analyzer (AIDA): An innovative tool for evidence-based planning," MENA working papers 6, International Food Policy Research Institute (IFPRI).
    9. Jungsuk Kim & Mengxi Wang & Donghyun Park & Cynthia Castillejos Petalcorin, 2021. "Fiscal policy and economic growth: some evidence from China," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(3), pages 555-582, August.
    10. Cassidy, Traviss & Velayudhan, Tejaswi, 2022. "Government Fragmentation and Economic Growth," MPRA Paper 112045, University Library of Munich, Germany.
    11. Fei Guo & Isabel Kit-Ming Yan, 2021. "Fiscal Decentralization and Fiscal Multiplier in China," GRU Working Paper Series GRU_2021_026, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    12. Chen, Sophia & Ratnovski, Lev & Tsai, Pi-Han, 2021. "Credit and fiscal multipliers in China: Evidence from a political economy based estimation," Journal of International Money and Finance, Elsevier, vol. 119(C).
    13. Bibhuti Ranjan Mishra, 2019. "The Size of Fiscal Multipliers in India: A State Level Analysis Using Panel Vector Autoregression Model," Global Business Review, International Management Institute, vol. 20(6), pages 1393-1406, December.
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    15. Bessho, Shun-ichiro, 2021. "Local fiscal multipliers and population aging in Japan," Japan and the World Economy, Elsevier, vol. 60(C).
    16. Ghazali Syamni* & Ichsan, 2018. "The Determinants of Districts/Cities Spending in Aceh Province: An Analysis of Electoral Districts," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 295-298:2.
    17. Debuque-Gonzales, Margarita, 2021. "Local fiscal multipliers and spillover effects: Evidence from Philippine regions," Economic Systems, Elsevier, vol. 45(2).

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