An Empirical Investigation On The Relationship Between Fiscal Policy And Economic Development Of China

The Chinese economy has achieved great success in both stability and sustained growth since the market economy was established.This paper seeks to explain that success by evaluating China's fiscal policy.Firstly,this paper seeks to illustrate the theoretical basis that fiscal policy maintaining economic stability and growth.Secondly,combining with China's practices in fiscal policy,this paper constructed an analysis framework that can be used to study the relationship between fiscal policy and economic development.Thirdly,using historical statistical data from China,this paper empirically studied the impact of fiscal policy on economic development.In the empirical section,it starts by testing a series of hypotheses derived from the analysis framework.First,it seeks to determine whether China's economic regulations act against the business cycle.Second,it aims to understand whether China stimulates economic growth through an expansionary fiscal policy and strong government R&D investment.Based on an HP filter technique combined with cross-correlation analysis and a Granger causality test,we suggest that fiscal policy in China is generally counter-cyclical and achieves obvious regulatory effects;further analyses using a co-integration model and the impulse response function confirm that there is no causal relationship in any direction between government expenditure and economic growth during the sample period,thus denying the applicability of "Wagner's Law" to China.In the medium and short term,government infrastructural investment can positively stimulate economic growth,as a consequence of its driving capacity to short-term demand and its promoting function to economic growth after putting into practical use,while in the long run,government infrastructural investment has a negative effect on economic growth,this may be caused by the long crowding out effect of government investment to private investment.The empirical results demonstrate that taxation can boost economic growth both in the long run and in the short run,which can be explained in two ways:one reason is that high taxation on low value-added industries can help promote the flow of investment to high value-added industries,thus increasing the marginal income ratio of investment capital,the other reason is that the increase of taxation will raise national savings rate,thus promoting the investment tendency of the private sectors;we also study the relationship between government R&D investment and economic development based on a panel regression model and a time-varying threshold model.The empirical results demonstrate that research and development investment from the government can boost long-term economic growth greatly,which has a greater economic output than that from the enterprise.While the results of the threshold model show that for different regions that under different technology level,the economic performance of different R&D carriers can be significantly different.Based on the empirical findings,we believe that the R&D carriers should be decided upon regional development characteristics,rather than extensively establishing enterprises as the main body at present.These empirical findings indicate that China's fiscal policy matches the basic policy orientation of Keynesian economics and is closely associated with its economic success.At the same time,China's emphasis on R&D investment practices the assertion that scientific and technological progress is of absolute importance to economic development.We believe that our study provides empirical support for policymakers by explaining how China has achieved its economic success.