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The Characteristics and Basic Reason of Procyclical Fiscal Policy

【Authors】
CONG Shuhai,ZHANG Yuanxin
【WorkUnit】
Shanghai University of Finance and Economics, 200433
【Abstract】

Since the reform and opening up, in order to resist external risks and maintain economic growth, China has continued to use proactive fiscal policies, and policy design has increasingly emphasized countercyclical discretionary choice concepts. However, the effect of the implementation of fiscal policy is controversial and does not fully satisfy the anti-cyclical characteristics, resulting in a deviation from controlled objective. In order to clarify the periodic characters of China's fiscal policy effect, this paper introduces multi-spectrum analysis, removes sequence trend components by maximum likelihood overlap wavelet decomposition (MODWT), avoiding expansion effect. This paper uses a structural vector regression model with time-varying parameters (TVP-SVAR) to analyze the relationship between both China's budget revenue and expenditure, and economic fluctuations. The results show that changes in China's budget revenue and expenditure are procyclical to business cycle. Specifically, one unit of change in China's economic growth rate will result in changes in the budget revenue and expenditure of 0.7 and 0.05 units or more in the same direction. A unit change in the budget revenue will result in a change in budget expenditure of 0.9 units or more. This paper also proves that the procyclical budgetary income is the main reason for procyclical expenditure.

JEL:E62, E63

【KeyWords】
Fiscal Policy, Business Cycle, Multi-Spectrum Analysis, Time-Varying Parameters Models