An Empirical Study On The Effect Of Fiscal Expenditure On The Current Account Of China

The balance of trade of China has kept large since 1998. In 2003, some important trade partner of China including America demanded RMB to appreciate reduce China's trade surplus with America. The trade friction between China and it's some trade partners become more and more acute. At the same time, trade surplus has made foreign exchange balance increase dramatically. Under the system of exchange settlement and sales, civil money supply has been forced to increase and the efficiency of monetary policy become weak. The pressure on RMB to appreciate raised extensive discussion about RMB exchange system reform in academic circles. In 2005, China had to reform RMB exchange system and the single-pegging US dollar system was changed to multiple-pegging system. The flexibility of RMB exchange rate increased and RMB began to appreciate slowly. At the same time , the central government of China organized many Chinese enterprises to visit America to make large scale purchase. They hoped this way can reduce the trade surplus with America and reduce the appreciation pressure on RMB. But allowing RMB to appreciate would hurt the enterprises whose major businesses are foreign trade and export would also be impaired. As everyone knows export is an important force to make China's economy to develop, so the appreciation of RMB is no good to reduce the pressure on employment and economy development. The effect of large scale purchase is not obvious and the political meaning is larger than economic meaning. Otherwise, the effect of monetary policy on balance payments is not obvious on the condition that the movement of international capital is restrained and the foreign exchange balance has been increasing year by year. So this article will study the effect of fiscal expenditure on the current account and the feasibility of using fiscal expenditure to adjust trade balance.There has been a lot of research on the relationship between fiscal expenditure and current account in balance payments theory. In foreign countries , many scholars have made much research on fiscal deficit issues and the effect of fiscal expenditure on current account. These research showed that the current account is correlated with fiscal deficit and fiscal expenditure. If fiscal deficit increased, trade deficit would increase. Domestic research on this kind of relationship is rare and it mainly exists in some text books which just imitates abroad theory. There is nearly no empirical research in China. So we can't judge if fiscal deficit and fiscal expenditure can influence the current account in China and if fiscal expenditure can be used to adjust the trade surplus of China.This article firstly finds theoretic basis for the relationship between the current account and fiscal expenditure from all kinds of theory of balance of payments. Then we will analyze the influence of fiscal expenditure on the current account by using the national identical equation of open economy and IS-LM-BP model. After that we will introduce the fiscal policy of China from 1978 to 2004 and the relevant macro-economy background. In the following part, we will use traditional measure method, ADF test and Granger causality test method to analyze fiscal deficit, the relationship between fiscal expenditure and the current account. Besides, we will use...