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Credit and Fiscal Multipliers in China

Author

Listed:
  • Sophia Chen

    (International Monetary Fund)

  • Lev Ratnovski

    (European Central Bank and International Monetary Fund)

  • Pi-Han Tsai

    (Zhejiang University)

Abstract

We estimate credit and fiscal multipliers in China, using subnational political cycles as a source of exogenous variation. The tenure of the provincial party secretary, interacted with the credit and fiscal expenditure used in other provinces, instruments for provincial credit and government expenditure growth. We find a fiscal multiplier of 0.75 in 2001-2008, which increased to 1.2 in 2010-2015, consistent with higher multipliers in a slower economy. At the same time, a credit multiplier of 0.2 in 2001-2008 declined to close to zero in 2010-2015, consistent with credit saturation and credit misallocation. Our results suggest that credit expansion cannot further support economic growth in China. The flip side is that lower credit growth is also unlikely to disrupt output growth. Fiscal policy is powerful, and can cushion the macroeconomic adjustment to lower credit intensity.

Suggested Citation

  • Sophia Chen & Lev Ratnovski & Pi-Han Tsai, 2019. "Credit and Fiscal Multipliers in China," GRU Working Paper Series GRU_2019_005, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2019_005
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    References listed on IDEAS

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    Cited by:

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    3. Pi‐Han Tsai & Yongzheng Liu & Xin Liu, 2021. "Collusion, political connection, and tax avoidance in China," Kyklos, Wiley Blackwell, vol. 74(3), pages 417-441, August.
    4. Li, Rong & Zhou, Yijiang, 2021. "Estimating local fiscal multipliers using political connections," China Economic Review, Elsevier, vol. 66(C).
    5. 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.
    6. Lawson, Jeremy & Watt, Abigail & Martinez, Carolina & Fu, Rong, 2019. "Chinese Financial Conditions and their Spillovers to the Global Economy and Markets," CEPR Discussion Papers 14065, C.E.P.R. Discussion Papers.
    7. Khan, Haider, 2023. "Socialism or Barbarism in the 21st Century? China vs. Global North during Capitalist (COVID) Crisis, Inequality and Poverty," MPRA Paper 117227, University Library of Munich, Germany.
    8. 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).
    9. Pi‐Han Tsai & Chien‐Yu Huang & Tsun‐Feng Chiang, 2020. "Fiscal Expenditure And Industrial Land Price In China: Theory And Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 38(4), pages 593-606, October.
    10. Mr. Lev Ratnovski & Sophia Chen & Pi-Han Tsai, 2017. "Credit and Fiscal Multipliers in China," IMF Working Papers 2017/273, International Monetary Fund.
    11. Guangdong Xu & Binwei Gui, 2021. "The non‐linearity between finance and economic growth: a literature review and evidence from China," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 35(1), pages 3-18, May.
    12. Debuque-Gonzales, Margarita, 2021. "Local fiscal multipliers and spillover effects: Evidence from Philippine regions," Economic Systems, Elsevier, vol. 45(2).
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    More about this item

    Keywords

    Credit Growth; Fiscal Stimulus; Macroprudential Policy; Multipliers; China;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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