Credit and fiscal multipliers in China: Evidence from a political economy based estimation

• Published in: Journal of international money and finance Vol. 119; p. 102481
• Main Authors: Chen, Sophia, Ratnovski, Lev, Tsai, Pi-Han
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.12.2021
• Subjects: China; Credit Growth; Credit Policy; Fiscal Stimulus; Multiplier; R12; Fiscal Stimulus; China; G21; H20; Multiplier; Credit Growth; Numbers: E63; Credit Policy
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2021.102481

•Subnational political cycles influence fiscal and credit policies in China.•The tenure of the party secretary, and the conditions in peer provinces, instrument for provincial fiscal expenditure and credit.•We estimate an on-budget fiscal multiplier of 1.0 and a credit multiplier of 0.2 during 2000–2019.•The credit multiplier has decreased since the Global Financial Crisis.•Fiscal expenditure has the strongest effect on manufacturing; credit growth on construction. We use subnational political cycles as a source of exogenous variation in fiscal and credit policies to jointly estimate the output multipliers of fiscal expenditure and of credit expansion in China. The tenure of the provincial party secretary, interacted with the growth of on-budget fiscal expenditure or credit in peer provinces, instruments for provincial fiscal expenditure and credit. We estimate an on-budget fiscal multiplier of 1.0 and a credit multiplier of 0.2 during 2000–2019. The credit multiplier has decreased since the Global Financial Crisis. Fiscal expenditure has the strongest effect on manufacturing, whereas credit growth has the strongest effect on construction.