Credit and fiscal multipliers in China

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 expendi...

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Bibliographic Details
Published in:BOFIT discussion papers 2019-02, Vol.2019 (5), p.4-32
Main Authors: Chen, Sophia, Ratnovski, Lev, Tsai, Pi-Han
Format: Article
Language:English
Subjects:
Economic conditions
Economic growth
Economic models
Efficiency
Expenditures
Federalism
Fiscal policy
GDP
Government spending
Gross Domestic Product
Identification
International finance
Investments
Lee, David
Macroeconomics
Politics
Provinces
Tenure
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Summary: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.
ISSN:1456-4564
1456-5889