We characterize the cyclical properties of fiscal policy in China along two related dimensions. First, we estimate the sign and size of the fiscal policy multiplier. Second, we assess whether fiscal policy is conducted pro- or counter-cyclically. To account for the challenges posed by China's vast geography, we use data at the provincial level. We find that (i) fiscal policy generally has ‘Keynesian’ effects, and (ii) fiscal policy is mostly conducted pro-cyclically. This means that fiscal policy is more an element of destabilization than a tool for stabilization.
The authors thank Michael Reddell, Kam Ki Tang, an anonymous referee, and participants at the Reserve Bank of Australia/Australian National University research workshop, China and East Asia in the Global Economy, Sydney, December 13–14, 2010, for comments received on an earlier version of this article.