Research On Nonlinear Effects And Sustainability Of Fiscal Policy In China

Fiscal policy is an important means for government to carry out macroeconomic regulation and control,however,there is always controversy on the effects of fiscal policy in the macroeconomic area,and Keynesian school and Classical school hold different views on fiscal policy effects.Since Giavazzi and Pagano(1990)found that fiscal policy had non-Keynesian effects,the traditional Keynesian theory began to face serious challenge,and some scholars also began to interprete the root causes of differences in fiscal policy effects from non-linear perspective.Studying nonlinear effects of fiscal policy can help government to accurately grasp the type and size of fiscal policy effects in different periods,and formulate timely fiscal policy appropriately according to macroeconomic characteristics,thereby improving the effectiveness and pertinence of fiscal policy.In order to alleviate the downwoard pressure on economic and maintain steady economic growth,the government usually implement the deficit fiscal policy.However,the long-time accumulated deficit and debt will induce fiscal risks and eventually threaten the sustainability of fiscal policy.Because fiscal policy sustainability is essential for the formulation and implementation of fiscal policy,it is also necessary to revisit the sustainability of fiscal policy from nonlinear perspective when the nonlinear effects of fiscal policy are confirmed.This paper investigates the formation mechanism of fiscal policy’s nonlinear effects,nonlinear characteristics of fiscal policy effects and fiscal policy sustainability combing domestic and foreign theoretical and empirical research.Firstly,this paper analyses the micro and macro formation mechanism of fiscal policy’s nonlinear effects from the perspective of consumer heterogeneity and business cycle fluctuation respectively.We divide the resident into Ricardian consumer and Rules of Thumb consumer,and study the inherent correlation mechanism between nonlinear effects of fiscal policy and consumer heterogeneity based on a New Keynesian DSGE model.After parameter calibration and numerical simulation,the results show that the effects of government expenditure on private consumption depend on the consumer structure,and the impact of government spending on private consumption will gradually change from Keynesian effects to non-Keynesian effects with the increase of Ricardian consumer proportion in residents,hereby forming nonlinear effects.However,under different consumer structure,government spending always has a positive effect on output,and has a negative effect on private investment.As we all know,there may be significant differences about the effects of fiscal policy in different stages of business cycle(recession regimes and expansion regimes),so this paper study the inherent correlation between the nonlinear effects of fiscal policy and business cycle fluctuation based on the STVAR model.It is found that government spending has nonlinear effects on private investment with the fluctuation of business cycle,but government spending doesn’t have nonlinear effects on output and private consumption.When the economy is in recession,the short-term and long-term direction of government taxes on output,private consumption and investment is just opposite and the effect of government revenue is significantly greater than periods of economic expansion.With the fluctuations of business cycle,the government taxe has nonlinear effects on output and private consumption.The effects of government consumption on output,private consumption and private investment are similar to government spending,but are quite different from government investment.Secondly,on the basis of exploring the micro and macro formation mechanism of the nonlinear effects of fiscal policy,this paper also test the time-varying effects and threshold effects of fiscal policy from the national and regional levels.By selecting a wide range of variables from different sectors of the national economy,we analysis the time-varying effects of fiscal policy based on TVP-SV-FAVAR model.The results show that China’s fiscal policy effect has significant time-varying characteristics,but the fiscal policy only has short-term impact on output,there is no long-term impact.In particular,government spending only has Keynesian effects on output,but the government tax has nonlinear effects on output.Fiscal policy has both short-term and long-term impact on private demand,in which government spending has nonlinear effects on private consumption and private investment,government tax only has nonlinear effects on private consumption,and the effects of government tax on private investment belong to Keynesian effects.At the same time,this paper takes the size of government as a transition variable and tests the nonlinear relationship between the local government spending and output growth based on PSTR model.The results show that government spending has significant threshold effects on output growth,and there is an asymmetric effect of government spending on output growth before and after the government size reaches 16.841%.With the expansion of government size,the Keynesian effects of government spending on output growth will gradually weaken.The government size in most areas is still in reasonable range,and the provinces with overinflated government size are mainly distributed in the western region.In the eastern and central regions,the impact of government spending on output growth will shift between Keynesian effects and non-Keynesian effects with the change of government size.In the western region,the nonlinear variation of the relationship between government expenditure and output growth is basically consistent with the national overall analysis.As far as the type of government expenditure is concerned.government consumption also has significant nonlinear effects on output growth,and the effects of government consumption on output growth will change from Keynesian effects to non-Keynesian effects when the government size gradually increases.However,government investment always has non-Keynesian effect on output growth.Finally,in view of the fact that China’s fiscal policy does have nonlinear effects;this means that the adjustment process of revenue and expenditure is also nonlinear,and then the traditional linear cointegration model can’t profoundly reveal the variation of fiscal policy sustainability.Therefore,under the theoretical framework of government intertemporal budget constraint,this paper investigates the sustainability of China’s fiscal policy from the national and regional levels based on nonlinear cointegration method.Compared with the threshold cointegration model,the time-varying cointegration model can capture the time-varying feature of cointegration coefficients between the variables more accurately.According to the results of the time-varying cointegration model,it is found that China’s fiscal policy is sustainable,fiscal revenue and expenditure have a long-term cointegration relationship,and cointegration coefficient is always between 0 and 1.According to the variation of time-varying cointegration coefficient,after tax sharing system reform and the Asian financial crisis broke out,the time-varying cointegration coefficient fell sharply,and the relationship between revenue and expenditure has been strongly impacted.However,during the global financial and economic crisis “new normal” period,the time-varying cointegration coefficient is very stable,and basically maintained at 0.9 or above,the relationship between revenue and expenditure has not been significantly affected.In addition to studying the sustainability of fiscal policy from national level,this paper also analysis the sustainability of local fiscal policy based on the panel cointegration model which considering structural breaks and cross-section dependence simultaneously.The results show that local fiscal policy is also sustainable,there is a significant cointegration relationship between revenue and expenditure,and the cointegration coefficient estimated by DOLS method is 0.444.According to the results of the estimated breaks in different provinces,the tax sharing reform in 1994 has a wide impact on the relationship beween local fiscal revenue and expenditure.In addition,non-parametric and heterogeneity panel Granger causality test results show that fiscal revenue and expenditure has a two-way Granger causality,and the relationship beween the fiscal revenue and expenditure is in line with with the fiscal synchronization hypothesis.In order to ensure the sustainability of fiscal policy,we need to take measures both from the revenue and expenditure side to address fiscal imbalance,and then the fiscal imbalances will gradually return to fiscal balance.In summary,this paper first investigates the relashionship between nonlinear effects of fiscal policy and consumer heterogeneity or business cycle fluctuation from the micro and macro perspectives.Then,based on the national and regional levels,this paper studies the time-varying characteristics and threshold characteristics of the impact of fiscal policy respectively.Finally,on the basis of confirming the non-linear effect of our fiscal policy,this paper further examine the sustainability of fiscal policy of central and local governments.