Reevaluation of Local Fiscal Multipliers in China

Abstract

The recent global financial crisis has renewed interest in the long-standing question of the size of fiscal multipliers. In this paper, we employ a peculiar feature of the allocation mechanism of China's intergovernmental transfers that triggers exogenous variations on local public spending: National Poor Counties (NPCs) designated by the central government enjoy preferential treatments in receiving central-local earmarked transfers. We construct an instrument variable to identify the multiplier. We find that the effects of local government spending on local output mainly concentrate on the non-tradable sector. We also find that local public expenditure has striking effects on stimulating investment but has negligible effects on in-county consumption. A puzzling feature of our results is that the estimated local fiscal multiplier is at the low-end of existing estimates.