Credit and fiscal multipliers in China

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Title: Credit and fiscal multipliers in China
Author: Chen, Sophia ; Ratnovski, Lev ; Tsai, Pi-Han
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
ISSN: 1456-5889
Series year: 2019
Series number: 5/2019
Year of publication: 2019
Publication date: 28.2.2019
Pages: 33
Subject (yso): luotot; julkiset menot; julkinen talous; tuotanto; talouskasvu
Keywords: Bofit-kokoelma; Kiina
JEL: E63; G21; H20; R12
Other keywords: credit growth; fiscal stimulus; China; macroprudential policy; multipliers
Abstract: We estimate credit and fiscal multipliers in China, using subnational political cycles as a source of exogenous variation. The tenure of the provincial party secretary, interacted with the credit and fiscal expenditure used in other provinces, instruments for provincial credit and government expenditure growth. We find a fiscal multiplier of 0.75 in 2001-2008, which increased to 1.2 in 2010-2015, consistent with higher multipliers in a slower economy. At the same time, a credit multiplier of 0.2 in 2001-2008 declined to close to zero in 2010-2015, consistent with credit saturation and credit misallocation. Our results suggest that credit expansion cannot further support economic growth in China. The flip side is that lower credit growth is also unlikely to disrupt output growth. Fiscal policy is powerful, and can cushion the macroeconomic adjustment to lower credit intensity.
Table of contents: Abstract 4 I Introduction 5 II Data and method 9 III Results 11 A Credit and fiscal multipliers 11 B The evolution of the multipliers 12 C Provincial heterogeneity 13 D Industry effects 14 IV Discussion 15 A Measurement issues 15 Credit 15 Off-budget expenditure 15 Provincial data 16 B Non-random political appointments 16 C “Open economy multipliers” 17 V Conclusion 18 Figures and tables 19 References 30

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