Study On Effects Of Economic Growth China's Fiscal Policy Shocks

How to select the fitted fiscal policy to deal with macroeconomic volatility hasbeen a problem governments closely watched, especially in the case of recession inthe economy. How to effectively curb the impact of the recession and stimulate theeconomic growth of a country becomes a problem of particular concern in order tomake perfect macroeconomic regulation and control. To this point, this paper firstlyreviews the implementation of macroeconomic volatility and fiscal policy to supply ageneral idea of how fiscal policy deals with the overall macroeconomic volatility inour country, and then analyzes the impact of fiscal policy including governmentspending, debt and taxes to economic growth based on the method of structural vectorauto regression. By studying the impact of fiscal policy on the effects of economicgrowth, we compare the contributions these three shocks make to the changes of GDP.And to make the fiscal policy’s effects better understood, we go on make a study ofthe squeezing effect of fiscal policy and its performance in the real economy.By identifying the shock of government spending, taxation and debt with themethod of structural vector auto regression, we found that the total impact on themacroeconomic responses appear as following: firstly, the reaction of GDP to theimpact of fiscal spending has a positive effect in the earlier period and negative effectin the later; secondly, the response of tax shock is positive which shows thenon-Keynesian effects of GDP; lastly, comparing to the response of GDP to the shockof government spending, the response of debt is positive and significantly higher asone of the most important means of demand management policies. Judging from thecontributions the three fiscal shocks make, we draw a conclusion that the response ofGDP to debt is largest, followed by taxes and the government spending comes last.To some extent the negative response of GDP to government spending showsthat there are some crowding-out effect when fiscal policy takes effects. So we go onstudying the crowding-out effect of investment, consumption and exports whichconsist the real economy to expand our analysis of fiscal shock to economy. After thefurther study, we found out that GDP, fixed assets investment and consumptionresponse instantly when there is a government shock, while the exports response witha certain lag. The investment of fixed assets shows the largest response to government shock while exports and consumption shows a considerable extent. And there arenegative responses of GDP and fixed assets investment to the shock of governmentspending but not all the time. By contrast, the response of consumption is positive allthe time and exports negative all the time too, which expresses that there arecrowding-out effects to investment and exports and crowding-in effects toconsumption. Combining the theoretical analysis of the formation of crowding-outeffects, we come to the conclusion that there exists crowding-out effects of ratemechanism and exchange rate mechanism but a crowding-in effects of pricemechanism in China.In this regard, I think we should focus on the long-term economic growth momentumat the same time when we try to curb the short-term recession in macroeconomicregulation and control. Also, the various measures cooperating with each other shouldbe considered to offset the negative impact of certain policy measures.