Re-estimating Fiscal Expenditure Multiplier In China

As the main form of macroeconomic policy,fiscal policy plays an important role not only in dealing with the negative impact of economic crises such as the global financial crisis and the European debt crisis in recent years,but also in dealing with the economic structural optimization and economic downturn pressure since the ?new normal?.As the space of monetary policy regulation decreases,the effectiveness of monetary policy also decreases,and government department pays more attention to fiscal policy.Since 2010,the government has adopted the policy combination of ?positive fiscal policy and prudent monetary policy? for nine years,fiscal policy has continued making efforts to stabilize economic growth.Fiscal expenditure is an important tool of fiscal policy,it achieves economic objectives by adjusting expenditure structure,expenditure form and expenditure scale based on some certain fiscal policy rules.Expanding fiscal expenditure is one of the main means of positive fiscal policy,its characteristics and effects have attracted much attention.The effect of fiscal expenditure policy is not only related to the characteristics of the policy itself,but also affected by the external economic environment.The dualistic economic structure is an unique economic feature of China,since the China economy is in a transitional stage,there are lots of state-owned enterprises and non-state–owned enterprises,the economic behaviors of these two kinds of enterprises are different,so are the responses to the fiscal policy,that is,there is obvious enterprise heterogeneity in China economy.Based on that,this paper measures the characteristics of China fiscal policy,such as fiscal information friction,fiscal persistence and fiscal volatility,then study the fiscal expenditure multiplier from two perspectives,the first perspective is the characteristics of fiscal policy,study the influence of fiscal policy characteristics on fiscal expenditure multiplier,the second perspective is the external economic characteristics,study the influence of enterprise heterogeneity and financial friction on fiscal expenditure multiplier,and thereby to provide empirical evidence for formulating reasonable and effective fiscal expenditure policy.Specifically,the objectives of this paper are mainly focus on the following points: Firstly,to measure the characteristics of fiscal expenditure policy in China.At present,there are large numbers of paper analyzing the fiscal expenditure policy in China,but few of them to study the fiscal policy from the perspective of policy characteristics.Fiscal information friction,fiscal persistence and fiscal volatility are the key characteristics of fiscal policy,which comprehensively reflect the implementation of fiscal policy from different perspectives.Based on the fiscal expenditure policy in our country,this paper measures the fiscal information friction,fiscal persistence and fiscal volatility of fiscal policy in China,so as to understand fiscal expenditure policy more scientifically.Secondly,study the mechanism and multiplier value of different fiscal expenditure.At present,the understanding of fiscal expenditure mechanism on the economy are different,some scholars believe that fiscal expenditure promotes economic growth form the demand side,while other scholars believe that fiscal expenditure raises the labor supply through substitution effects and negative wealth effects,thereby improving the total output.However,the existing research mainly focuses on the total fiscal expenditure,ignoring the difference between the impact of different fiscal expenditures on the economy and the value of the multiplier.This paper divides total expenditure into government consumption expenditure and government investment expenditure according to function of fiscal expenditure.Under the framework of DSGE model,this paper examines the mechanism of different fiscal expenditure on the economy and estimates the corresponding multiplier value.Thirdly,explore the impact of fiscal policy characteristics on fiscal expenditure multiplier.This paper constructs DSGE models incorporating different policy characteristics,then investigates the impact of different fiscal policy characteristics on the fiscal expenditure mechanism and the value of fiscal multiplier.Fourthly,study the impact of external economic characteristics such as enterprise heterogeneity on the fiscal expenditure multiplier.The "dualistic" economic structure is an unique economic feature in China.However,there is no paper to study its effect on the fiscal expenditure multiplier.This paper attempts to construct a two-sector DSGE model which incorporates the enterprise heterogeneity,and explores the different effects of fiscal expenditure on different economies under the DSGE model,combined with mathematical derivation and numerical simulation to study the impact of enterprise heterogeneity on the fiscal expenditure multiplier.According to the above research objectives,this paper includes five parts and seven chapters: The first part is the first chapter,the introduction of this paper.Firstly,introduce the background and significance of this research,and provide the necessity and importance of studying the fiscal expenditure multiplier in China.Secondly,give introduction of the main contents,research framework and research methods of this paper.At last,give the innovations of the paper.The second part is the second chapter,the literature review of this paper.This chapter reviews the domestic and foreign literatures which related to the fiscal expenditure multiplier,from the perspectives of the improvement of research methods and influencing factors to sort out the literatures,then summarizes the literatures,points out the shortcomings of existing research,so as to clarify the innovations of this paper.The third part is Chapter3,Chapter 4 and Chapter 5.This part measures the characteristics of fiscal expenditure policy in China,that is fiscal information friction,fiscal persistence and fiscal volatility,then studies the impact of these fiscal characteristics on fiscal expenditure multiplier.Among them,Chapter 3 mainly studies the effect of fiscal information friction on fiscal expenditure multiplier.Firstly,this chapter estimates the degree of fiscal information friction in China fiscal expenditure policy.Secondly,constructs one-sector DSGE model which incorporates the characteristic of fiscal information friction,then studies the different impact mechanisms of information shock and noise shock,based on that,simulates and analyzes the influence of fiscal information shock under different fiscal information friction scenarios.At last,calculates the fiscal expenditure multiplier under different fiscal information friction scenarios and the corresponding losses of fiscal policy effect.Chapter 4 mainly studies the effect of fiscal persistence on fiscal expenditure multiplier.In this chapter,firstly,divides the fiscal expenditure into government consumption expenditure and government investment expenditure according to the function of fiscal expenditure,then estimates the persistence of different fiscal expenditures.Secondly,constructs one-sector DSGE model,which incorporates the Edgeworth property between private consumption and government consumption and the positive externality of government investment,then compares and analyzes the macroeconomic effects and micro-mechanisms of government consumption expenditure and government investment expenditure.At last,measures the long-term and short-term multiplier effect of these two fiscal expenditures,then simulates and analyzes the impact of fiscal persistence on fiscal expenditure multiplier.Chapter 5 explores the impact of fiscal volatility on fiscal expenditure multiplier.Firstly,this chapter constructs Stochastic Volatility Model(SVM)to measure the time-varying volatility of government consumption expenditure and government investment expenditure;Secondly,constructs one-sector DSGE model which incorporates the fiscal time-varying volatility,indentifies the fiscal policy shock and fiscal policy volatility shock,then investigates the impact and mechanism of different fiscal policy volatility on China economy.Further,uses dynamic model to study the effect of fiscal volatility on fiscal expenditure multiplier.The fourth part is Chapter 6,this part aims to explore the impact of external economic characteristics on the effectiveness of fiscal expenditure policy in China.Based on the dualistic economic structure in China,there is obvious enterprise heterogeneity and financial friction in economic society,so in this part,we mainly study the effect of external economic characteristics such as enterprise heterogeneity and financial friction on the fiscal expenditure multiplier.Firstly,by constructing a two-sector DSGE model which involves enterprise heterogeneity and financial friction,this part studies the difference impacts of government consumption expenditure and government investment expenditure on the state-owned and no-state-owned economies in China.Secondly,it estimates the multiplier effect of the two kinds of fiscal expenditure on different economies,based on above research,then it investigates the effect of enterprise heterogeneity and financial friction on the fiscal expenditure multiplier by combing mathematical derivation and simulation analysis.The seventh part is Chapter 7,summarize the conclusions of this paper,and give the policy suggestions,then finally point out the shortcomings of this research and the direction of further study.Based on the fiscal policy characteristics and the external economic characteristics,this paper studies the impact of the above characteristics on the fiscal multiplier,the main conclusions are as follows:Firstly,the effect and mechanism of government consumption expenditure and government investment expenditure on China economy are obviously different.Government consumption expenditure stimulates economic growth from the demand side by expanding the total social demand,and government investment expenditure promotes economic growth from the supply side by improving the output efficiency of enterprises.The government investment expenditure multiplier is larger than the government consumption expenditure multiplier.Secondly,there is information friction in China fiscal expenditure policy,and the proportion of fiscal information in fiscal policy is 0.65.The mechanisms of fiscal information shock and noise shock on economy are quite different,and the effect of information shock is larger than that of noise shock.The higher the degree of information friction in fiscal policy,the weaker the effect of information shock,and the smaller the fiscal expenditure multiplier.The difference of fiscal expenditure multiplier under different fiscal information friction scenarios is mainly reflected in the non-implement stage of fiscal policy,after the implementation of fiscal policy,the fiscal expenditure multiplier are starting to converge.Thirdly,the main conclusions are as follows: the estimated value of the persistence of government consumption expenditure is 0.6859,and the estimated value of the persistence of government investment expenditure is 0.7948,the government investment expenditure is more durable.The persistence of fiscal expenditure is positively correlated with the fiscal expenditure multiplier,the higher persistence of fiscal expenditure,the larger the fiscal expenditure multiplier.Fourthly,fiscal expenditure has obvious characteristic of time-varying volatility,according to the value of volatility,the total fiscal expenditure has the smallest volatility,while the government consumption expenditure has the largest volatility.Fiscal volatility has a significant negative impact on macro economy,leading to a decrease in output and an increase in inflation,and the negative impact of government expenditure volatility is relatively larger.The two kinds of fiscal expenditure volatility have similar mechanism on economy,mainly through the total demand channel of household sector and the upward-pricing preference channel of the production section,then results in larger markup in production sector,and larger markup will lead to a decrease in demand and output,an increase in inflation.Fiscal volatility has a significant negative influence on the fiscal expenditure multiplier,the high the volatility of fiscal expenditure,the smaller the fiscal expenditure multiplier.Fifthly,the mechanism of government consumption expenditure and government investment expenditure on state-owned and non-state-owned economies is quite different.The multiplier effect of government consumption expenditure and government investment expenditure on state-owned economy is larger than that of non-state-owned economy.Enterprise heterogeneity and financial friction have a significant influence on the fiscal multiplier,the long-term multiplier effect of government consumption expenditure and government investment expenditure is monotonically decreasing on financial friction,that is,the fiscal expenditure multiplier will get the largest value when the enterprise heterogeneity and financial friction are not taken into account,but when both of these two economic characteristics are taken into consideration,the fiscal expenditure multiplier decreases obviously.The innovation of this paper is mainly embodied in the following four aspects:Firstly,this paper studies the fiscal expenditure multiplier from a new perspective.Specifically,this paper re-estimates fiscal expenditure multiplier based on the fiscal policy characteristics such as fiscal information friction,fiscal persistence,fiscal volatility and external economic characteristics such as enterprise heterogeneity and financial friction.According to research review,it is not difficult to find that the analysis of fiscal expenditure multiplier from the perspective of fiscal policy characteristics is a relatively new research field,and it is currently missing in China,and the research on estimating fiscal expenditure multiplier from the perspective of enterprise heterogeneity is still blank.Therefore,this paper provides a new research perspective for the theoretical and empirical research on the fiscal expenditure multiplier.Secondly,based on "dualistic" economic structure,this paper innovatively constructs a tow-sector DSGE model to analyze the impact of enterprise heterogeneity on fiscal expenditure multiplier in China.Compared with the existing models,the main advantages of the model constructed in this paper are:(1)According to the function of fiscal expenditure,divide the total fiscal expenditure into government consumption expenditure and government investment expenditure,fully considering the Edgeworth property between private consumption and government consumption,as well as the positive externality of government investment on enterprise production activities;(2)Incorporate the enterprise heterogeneity in the DSGE model,the differences of capital output elasticity and credit policy between state-owned and non-state-owned enterprises are fully taken into account;(3)Consider the most important practical and nominal friction characteristics such as price stickiness,consumption habit,and investment adjustment costs when constructing models.Finally,the model is estimated based on Chinese data,which makes the model more realistic to simulate the economic operation of China,and provides a scientific and reasonable analysis framework for relevant research.Thirdly,combined mathematical derivation and numerical simulation,this paper defines the influence channel and effect of financial friction and enterprise heterogeneity on fiscal expenditure multiplier.The enterprise heterogeneity affects the fiscal expenditure multiplier through the factor allocation channel,while the financial friction affects the fiscal expenditure multiplier through the private investment channel.Fourthly,this paper provides new empirical evidence.The study of estimating fiscal expenditure multiplier from the perspective of fiscal policy characteristics and enterprise heterogeneity is currently blank in China,so the research of this paper can provide new empirical evidence from China for the existing fiscal multiplier theory.