Fiscal Decentralization and Fiscal Multiplier in China

A fundamental aspect of China’s transition to a market economy is the change in fiscal decentralization marked by the tax reform in 1993. This paper examines the effect of revenue and expenditure decentralization and their divergences on fiscal spending multipliers in China using nationally aggregate and provincial-level data from 1978 to 2017. Our investigations show that expenditure decentralization weakens the efficacy of spending policies, while revenue decentralization enhances the efficacy. Moreover, the divergence of revenue and expenditure decentralization has significantly decreased the provincial spending multiplier, while its effect on the aggregate spending multiplier is insignificant. The provincial results are robust to the inclusion of off-budgetary expenditure and revenue, using different estimates of multipliers and different measures of fiscal decentralization, considering from a long-run perspective, and addressing the endogeneity issue.

Fiscal Multipliers and Foreign Holdings of Public Debt

This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign savings when selling their debt. We test this hypothesis for the US in the post-war period and for a panel of 17 advanced economies from the 1980s to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for these countries. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950s and 1960s and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today.

Effects of the fiscal policy on macroeconomic outcomes

The dissertation consists in three chapters addressing the effects of fiscal policy on macroeconomic outcomes. In the first chapter, I take advantage of the scarcity of evidence on the effects of public spending on GDP growth in developing countries. Thus, the main focus is in the top five emerging economies, Brazil, Russia, India, China and South Africa, known as BRICS, that accounts for almost a quarter of world GDP have received little attention. Through an Auto-regressive Panel-Vector (P-VAR) model, using quarterly data from 1997Q1 to 2017Q4, I estimate that the government spending multiplier is 0.145 percent on impact (t=0), and a cumulative multiplier of -0.125 percent percent in 5 years. Also, I analyze how the results of the baseline model vary according to specification adjustments, different order of the variables, and the use of alternative trend removal mechanisms. The robustness analysis shows that the multiplier is sensitive to these changes, which provides evidence of the possible causes of the varied results. In the second chapter, I estimate the local fiscal multiplier using the literature on incumbency status and local spending. The literature suggests that regional authorities seek to in uence their voters through increases in government spending during the election years. Given this, I build an instrument based on term limits and electoral laws established in the Legislatures of the 50 US states and the District of Columbia, to estimate the local fiscal multiplier for the period of 2007-2016. My estimate of the fiscal multiplier in the baseline model is 1.274. Through a robustness check, my estimator uctuates between 1.208 and 1.239. My results are consistent with the estimations in the geographic cross-sectional multipliers literature for the United States. In the third and last chapter, I evaluated the fiscal policy effects in a dollarized Latin American economy such as Ecuador. Therefore, I estimate both the linear and state-dependent impact and cumulative multiplier for the period between 1991Q1 and 2019Q4. The main result shows that the linear impact multiplier is 0.79 and fades in the medium and long term. Furthermore, in expansions and recessions, the impact multiplier is 1.42 and 0.91, respectively. However, the effect disappears in the long run when dealing with expansions. On the other hand, in periods of recession, the cumulative multiplier is 0.64, significantly different from zero at a 90 percent confidence interval. The results suggest that the multipliers are distinct between states at a 5 percent level of significance.

HOW FAR FISCAL DOMINANCE MATTERS FOR A DEVELOPING ECONOMY

The growing public debt that intensifies with a frequency of economic crises grasps a high rating in the current economic debates. There is an urgent need for implementing an effective policy regime targeted at handling the public debt problem. The fiscal dominance policy, usually practiced to ensure strong recovery and growth, has a strict guideline for identifying a degree of fiscal expansion and monetary accommodation. Given a dilemma between growth and debt burden, the government should mobilize the most effective policy instrument targeted at the highest fiscal multiplier and does not cross a debt-to-GDP threshold ratio. Following an effective practice of fiscal management, this instrument is associated with public investment. The paper aims to assess the magnitude of the public investment multiplier by following a stable growth path limited by a prescribed debt limitation for a developing economy. To achieve the goal, we use an elaborated New Keynesian model, which besides an active fiscal and monetary stances, also includes a high share of non-Ricardian households, the separability in preferences between private and government consumption, a low level of public investment efficiency, and the substantiated degree of nominal and real rigidities. The obtained present value cumulative output multiplier for public investment grasps the point 2.0 in maximum over two years of the impulse response function. The multiplier effect proves to be high enough to offset temporary public debt growth and maintain a sustainable growth path over the long run. The verified measure of fiscal dominance contradicts an active monetary stance and, among other things, has to be counterbalanced by an appropriate efficiency and productivity of public investment and degree of price stickiness. Keywords: fiscal policy, monetary policy, fiscal-monetary interaction, fiscal dominance, fiscal multiplier, DSGE modeling. JEL Classification O47, E63, H63, D58 Formulas: 1; fig.: 2; tabl.: 0; bibl.: 21.