Research On The Dynamic Consistency Of Intergovernmental Fiscal Policy

In economic transition period,under the government management and fiscal decentralization,the central and local governments have different interests,policy objectives and incentives.Local governments selectively implement the central government's fiscal policies and adopt local reform strategies which are not always consistent with the central government's fiscal policies.Moreover,due to the limitations of fiscal policy tools,the existence of multi governments and other factors,it is different to implement the policies for the government under consistency of intergovernmental fiscal policy which is more complicated than under the control of the single government.It has inconsistent preferences and functions between local government and central government,so some local governments may not implement central government fiscal policies,which is likely to cause conflicts between the central and local governments,as well as local governments which has lowered down the effectiveness of the central government's fiscal policy,and even makes it the starting point for the government to implement the next round of discretionary fiscal policy.Therefore,it has important theoretical and practical significance to study the dynamic consistency of intergovernmental fiscal policy in countries like China under economic transition.When formulate fiscal policy,there are generally two strategies:automatic stability and casual discretion.For fiscal policy,if the equilibrium solution is the same under the two strategies,then the fiscal policy is dynamic and consistent,otherwise there will be dynamic inconsistency.Auto-stabilization policy can also be called rule strategy,which is crucial for the economy that allocates resources based on market.Because of the differences in individuals,decentralized decision-making may lead to the loss of efficiency in resource allocation,while rules can minimize efficiency losses due to individual differences.However,from the perspective of theoretical research and economic practice,neither the complete automatic stability strategy nor the casual discretion has been favored by policy makers.On the contrary,policy makers are more willing to choose a more moderate policy,that is,while maintaining the right to choose discretion,but they also commit to the implementation of the established rules under certain conditions.The theory shows that the formulation and implementation of fiscal policy is a dynamic game between the central and local governments and the public.Ignoring any player in the game will lead to the dynamic inconsistency of fiscal policy,thus deviating from the optimal plan formulated by the Party and the state,and consequently causing the loss of social welfare as a whole.In practice,no government has an ideal state of non-default commitment fully complied with them.The dynamic consistency problem objectively reveals the true relationship between the rational participants in the world.It abandons some of the assumptions in the traditional economic theory and replaces them with more realistic constraints,making the traditional economics gradually return from the Ideal to reality.This paper studies the output gap,economic cycle and finance of the central government fiscal policy and local government fiscal policy under combination of combines the normative research and empirical analysis,qualitative research and quantitative analysis,comparative research and comprehensive analysis.It also compares the relationship between some fiscal policies and economic cycle fluctuations.This paper's several innovations are in the following:First,the theory of dynamic consistency is applied to the study of the fiscal policy relationship between the central government and local governments,rather than merely studying the dynamic consistency of the central government or local government's own fiscal policy.The traditional theory holds that local governments adopt the same fiscal policy as the central government which matters only between the policy makers and policy implementers.Therefore,the central government and local governments are generally studied as a whole.Secondly,this paper uses GMM dynamic panel model to test the consistency of fiscal policy between central government and local government from 1998 to 2017.The research shows that although the statistical analysis of China's local government fiscal policy shows the pro-cyclical trend,the empirical test after controlling the relevant variables shows a significant counter-cyclical feature.At the same time,there is dynamic consistency between the fiscal policies of the local governments and the central government,especially in the central and Western regions,but there is dynamic inconsistency between the fiscal policies of the local governments and the central government in the eastern region.Unlike the eastern and central regions,the western region has demonstrated significant expenditure and institutional inertia.Thirdly,this paper uses the incomplete information dynamic gaming analysis method to analyze the intergovernmental fiscal policy and solve the equilibrium of the expected return of the fiscal policy gaming between the local government and the central government.The analysis shows that,in general,when U_L-P_L>?C,local governments will choose to implement fiscal policies that are inconsistent with the central government;when U_L-P_L<?C,local governments will choose to implement fiscal policies that are consistent with the central government.Whether the fiscal policy formulated and implemented by the local government is consistent with the central government's fiscal policy depends mainly on the welfare of the local government after implementing the e discretionary fiscal policy,and also depends on the central government's penalty cost and probability of the central government for the dynamic inconsistent local government.Through the above analysis,this paper hopes to answer the following three questions:First,is there any dynamic inconsistency in intergovernmental fiscal policy?Second,if there is dynamic inconsistency in intergovernmental fiscal policy,what is the mechanism of it,or what causes the inconsistency of intergovernmental fiscal policy?Third,what impact does the inconsistency of intergovernmental fiscal policy have on the fluctuation of economic cycle?For answering the above three questions,we will focus on the central government's formulation of macro-financial policies based on the full consideration of local government needs,so that the local government's fiscal policy based on maximizing its own utility function are in line with the national fiscal policies,so as to maximize the effectiveness of the fiscal policy collection.This paper is divided into seven parts:introduction,from the origin of dynamic consistency theory,the impact of fiscal decentralization on fiscal policy consistency,the economic stability and growth effect of fiscal policy consistency,etc.It analyzes the relevant theoretical research results of previous domestic and foreign scholars.The first chapter comprehensively analyzes the relevant concepts,theoretical basis and influencing factors of the dynamic consistency of intergovernmental fiscal policy,and refines and summarizes the theoretical basis of the dynamic consistency of intergovernmental fiscal policy.The second chapter analyzes the fiscal policies of the central government and local governments over the years,and compare the growth rate of the central government's fiscal expenditure with the growth rate of the local government's lagging fiscal expenditure directly.The research shows that the central government's fiscal expenditure from 1998 to 2017.The fluctuation of the growth rate of local fiscal expenditure in the first phase is more consistent.That is to say,the fiscal policy of local government will be adjusted according to the central government's fiscal policy,and the intergovernmental fiscal policy generally has dynamic consistency.The third chapter tests the relationship between local government fiscal policy and economic cycle and the relationship between central government and local government fiscal policy,showing that the overall fiscal policy implemented by local government tends to be counter-cyclical,but the fiscal policy adopted by different local governments in different periods may have pro-cyclical characteristics.Although the results of the fixed effects model show that there is a significant dynamic inconsistency in intergovernmental fiscal policy.However,after dealing with the endogenous problems of local government fiscal expenditure,the fiscal policy between the central government and local governments showed dynamic consistency.There is dynamic inconsistency between the central government and the local governments in the eastern region,and between central and Western regions.Unlike the eastern and central regions,the western region has demonstrated significant expenditure rigidity and institutional inertia.The fourth chapter discusses the mechanism of the dynamic inconsistency of intergovernmental fiscal policy,and the equilibrium result of expected revenue of fiscal policy game between local government and central government is solved by using dynamic gaming analysis method of incomplete information.The analysis shows that whether the fiscal policy formulated by the local government is consistent with the central government's fiscal policy depends mainly on the welfare of the local government after the implementation of the discretionary fiscal policy,and also on the penalty cost and probability of the central government's dynamic inconsistent fiscal policy.Based on the utility maximization,the utility function model is constructed for the central government and local governments,and a possible explanation for the inconsistency of intergovernmental fiscal policy dynamics is given.The fifth chapter discusses the impact of the dynamic inconsistency of fiscal policy.Fiscal policy is divided into rule part(predictable part)and discretional fiscal policy part(unpredictable part),and it explains the impact of discretional fiscal policy on economic fluctuations.The sixth chapter proposes policy recommendations to improve the dynamic inconsistency of intergovernmental fiscal policy based on the previous analysis.There are also some shortcomings in this paper.Due to the limitation of data,I have tried to decompose and estimate the national data by using the same model.However,unlike the regional data,it exist the collinearity problem between the explanatory variables which is hard to explain.Although some studies have shown large differences in the correlation between the parameters of national and local models in different directions,we still could not include them in this paper for discussion.