The Macroeconomic Effects Of Fiscal Policy Shock

The macroeconomic effect of fiscal policy shock is always an important issueconcerned by economists and policy makers. The Chinese government has paid muchattention to the macro-control of fiscal policy, and the Twelfth Five-Year Planintroduced in2011has put forward the guiding idea to strengthening and improvingmacro-control, and enhancing the scientific and predictability of the macro-control.Dynamic Stochastic General Equilibrium (DSGE) model is one of the most popularanalysis tools in macroeconomic field nowadays. It makes the macroeconomic theorymodel have a clear micro-theoretical basis, which effectively avoid Lucas criticism.Meanwhile, studying the macroeconomic effects of fiscal policy shocks by usingDSGE model can clearly show the mechanism of economic operations and make theresults more convincing. Therefore, based on the domestic and foreign researchliterature, and according to annual and quarterly data of our country, this paper buildsa DSGE model to simulate the macroeconomic effects of fiscal policy in differentsituations.Firstly, this paper constructs a DSGE model from the perspective of Neo-classicaltheory, and calibrates the model parameters based on related annual data of ourcountry since the reform and opening up policy. The paper simulates the macroeconomiceffects of fiscal expenditure under a perfectly competitive market environment, thereare no nominal frictions and no monetary factors in the model. This DSGE model isan extension of Finn(1998)’s model and its main characteristic is that the consumptionfunction includes a constant elasticity of substitution index between privateconsumption and non-productive fiscal expenditure. Secondly, the paper introducesconsumption tax, labor income tax, capital income tax, etc to the Neo-classical DSGEmodel. What’s more, we adjust the model parameters based on related annual data ofChina since1978. The model simulates macroeconomic effects of tax shock under thesituation of a perfectly competitive market environment, no nominal frictions, nomonetary factors, etc. Then, the paper also extends the modern New KeynesianismDSGE model, namely, the SW model. For example, we introduce liquidity constraintsof consumers, the mechanism of reaction of fiscal expenditure and revenue togovernment debt scale to the model, and divide fiscal expenditure into nonproductiveexpenditure and productive expenditure, we also takes into account of consumption tax, labor income, capital income tax, etc. Meanwhile, using quarterly data from1996to2012, the paper applies the Bayesian estimation method to simulate themacroeconomic effects of fiscal expenditure shock and tax shock under the situationof monopolistic competition market, price stickiness, wage stickiness, consumptionhabits, presence of monetary policy regulation, etc. Fourthly, this paper simulates theimpact of the rules of financial financing and monetary policy on the macroeconomiceffects of fiscal policy based on our extended New Keynesianism DSGE model.The results shown that, Firstly, the Neo-classical DSGE model has a strongexplanatory power to the economic reality of our country since the reform andopening-up, and the New Keynesianism Model has a strong explanatory power toChina’s real economy since1996. Secondly, both the Neo-classical model and NewKeynesianism model simulation indicates that different types of fiscal expenditureshock and tax shock have different macroeconomic effects. The macroeconomic effectof productive fiscal expenditure shock is bound up with elasticity of output withrespect to public capital. And increasing in capital income tax has most negativeeffect on output in the short run. Thirdly, under the Neo-classical DSGE model, theimpact of non-productive fiscal expenditure to private consumption has a closerelationship with the complementarity of non-productive fiscal expenditure andprivate consumption. What’s more, by improving the complementarity ofnon-productive fiscal expenditure and private consumption, the increase innon-productive expenditure can stimulate output and promote residents consumption.Fourthly, according to the New Keynesianism DSGE model, the impact ofnon-productive fiscal expenditure on private consumption has a close relationshipwith consumer’s liquidity restriction. Moreover, after introducing the mechanism ofreaction of fiscal expenditure and revenue to government debt scale, thenon-productive fiscal expenditure shocks don’t always have a positive effect onoutput, and tax shocks don’t always have a negative effect on output. Fifthly, financialfinancing rules have a significant influence on the macroeconomic effects of fiscalexpenditure, and the response of nominal interest rate to inflation also has asignificant influence on the macroeconomic effects of fiscal expenditure.Finally, we summarize the main findings of this paper, put forward policyproposals based on the conclusion, and point out the future research directions.