Local Government Behavior And Economic Fluctuations

Since the local government is deeply dependent on the land finance,it has the stimulus to boost housing prices,thus appreciating surrounding land's value.The central government,however,has diversified targets.It uses administrative intervention to curb housing prices,which causes abnormal economic fluctuations.This paper puts land finance and administrative intervention's effects on economic fluctuation into a complete framework of study.Land transfer income is used to measure local finances,while a dummy variable representing housing restriction policy is used to measure administrative intervention.A simple econometric model is created and the results are as follows.Firstly,land transfer income does not affect economic fluctuation significantly.If administrative intervention exists,however,once land transfer income increases by 1%,economic fluctuation increases by 0.93%.Secondly,gross investment is indeed a main channel for land finance and administrative intervention's effects on economic fluctuations,if land transfer income rises and administrative intervention exists,once gross investment increases by 1%,economic fluctuation increases by 0.11%.Thirdly,land finance's influence mechanism of economic fluctuation differs in line/hotspot second-tier cities and non-line/hotspot second-tier cities,which can be explained by diversified expectations.For line/hotspot second-tier cities,once the lag of land transfer income increases by 1%,economic fluctuation decreases by 1.88%.When the real estate market is overheated,local government anticipaites that central government will employ strict regulation.Hence,before administrative intervention comes,local government will strive for more land transfer income,meaning current land transfer income and gross investment declines,and current economic fluctuation is eased.For the non-line/hotspot second-tier cities,once land transfer income increases by 1%,economic fluctuation increases by 1.34%.When the real estate market is overheated,local government anticipates that it is not subject to administrative intervention.Thus,current land transfer income and gross investment rises,exacerbating current economic fluctuation.Therefore,we need to divide central and local powers reasonably,regulate local government's investment behavior according to a more clear power separation system,thus gradually reducing local government's dependence on land finance.