Study On The Macroeconomic Effects Of Fiscal Policy Rules

Fiscal policy, as a main macro-control means of government, has always been domestic scholars’ macroeconomic subject for in-depth discussion. China’s economy has been seeing a continuous downturn ever since the global financial crisis exploded in 2008. In the meanwhile, the scale of government debts keeps expanding and problems like fiscal policy continuity are faced with, therefore, how to make full use of the fiscal policy, maintain a reasonable economic running and play the significant role of supply structural reform under the New Normal has become a key subject of the current government and educational circles. Fiscal policy rules have great influence upon government on realizing its macro-control purposes and stabilizing its debts scale. The economic implication of fiscal policy rules relies on the studied policy tool combination and endogenous feedback mechanism on economic system.Based on the dynamic stochastic general equilibrium framework of New Keynesian.This study analyzes fiscal policy through the endogenous feedback mechanism of the impact of fiscal policy adjustment on government debt scale,government transfer payments automatic stabilization mechanism, counter-cyclical adjustment mechanism of active fiscal spending on the output gap and inflation gap,government financing mechanism and policy adjustment decision-making timing.Additionally, factual observed data from the first quarter of 1996 to the third quarter of 2005 is used; Bayes estimation is applied for model parameters of fiscal policy.Macroeconomic effects and the dynamic transmission mechanisms are analyzed based on the New Keynesian model. We get the following conclusion:Adjustment of fiscal policy is rule-governed and time-phased. Firstly, in terms of decision-making timing, tax policy is adjusted according to the last phase of government debt scale, consumption expenditure and government investment expenditure according to the last phase of the output gap and inflation gap, and government transfer payment according to the current output gap. Secondly, the regression sensitivity of policy is relatively low, and weak automatic stabilizer and incomplete controlling on the tax rules are applied in the study, the value of impact of fiscal policy continuity is from 0.5 to 0.7, which is in the average level. Also, the sensitivity of fiscal expenditure on the output gap is significantly higher than that sensitivity on the inflation gap. Thirdly, when sensitivity of tax policy on thegovernment debt scale reduces during contracting phase, government tends to put more focus on the tax rates, that is, to raise funds for the stimulative fiscal policy through debt financing; when sensitivity of government investment spending on the output gap increases, government prefers to stimulate economy by increasing government investment expenditure.Tax policy rules affect multiplier effects of fiscal policy. Researches indicate that fiscal expenditure under effect of debt financing mechanism is more conducive to stimulating output in a short term. In medium-and-long-term perspective, direct tax financing shows more damage than indirect financing to private investment, and the crowding-out effect of indirect financing on private consumption is larger than direct financing, and output effect of direct financing in the medium to long term is more significant. Meanwhile, liquidity constraints proportion changes affect multiplier effect of fiscal expenditure under different rules of financing as expenditure impact under different rules of financing decrease when proportion of liquidity constraints on private investment and total consumption increases.Fiscal expenditure rules affect the macroeconomic effects of government debt expansion. Studies show that the time when government debt expansion crowds out private investment and private consumption depends on the tool set of stimulative fiscal policies and the way government finances, and sensitivity of monetary policy on the output gap and the inflation gap impacts private investment dynamic response path.The effect of crowding-in on private consumption gets larger when government transfer payment increases and the consumption tax and labor income tax decrease.The positive impact of different types of policies presents in the form of crowding out effect on private investment during the early phase and later crowding in effect. Under the positive impact of government consumption expenditure, government investment expenditure and consumption tax, duration of the trajectory of the private investment response reversal is the longest, while the shortest duration of tax is of capital income.Reducing labor income tax and capital income tax in last phase crowds out private investment capital in greater intensity. What′s more, the fluctuation of monetary policy mainly affects values of private investment deviation from steady state and the dynamic response speed of returning to the steady-state level, but will not alter the direction of private investment. When the capital income tax reduces, to remain the low sensitivity of monetary policy on output and high sensitivity on inflation gap can reverse the impact of crowding out effect on private investment during the initial stage.To analyze the policy effect of fiscal policy rules, we find that, stabilization effect on the output of current fiscal policy is superior, while the stabilization effect on employment and price level can not reach the same level. Expansionary fiscal spending policy is easier to trigger inflation. Fiscal policy of incomplete fixation on the tax rate and weak current automatic stabilizers rules fail to balance both two targets of keeping output and prices stable. In terms of stimulatory effect, to increase government consumption expenditure and reduce capital income tax stimulates output more significantly and to reduce labor income tax is more conducive to employment.Further policy module result indicates that different degrees of the automatic stabilizers rules have little effect on fiscal policy and stable output, employment, and price target. The rule to put strong focus on the debt, that is, via tax financing for expansionary fiscal policy the tax rates, that is, to raise funds for the expansionary fiscal spending through tax financing, goes against stabilizing policies, while the current rule of incomplete fixation on tax rates is more suitable for a stable economic running. Remaining proper consistency of expenditure policies can stimulate output growth and improve employment. Additionally, degree of the automatic stabilizers rules have little effect on stimulation on expenditure policies, but if financing rules and decision timing change at the same time, they will have a significant impact on stable and stimulating effects of fiscal policy.Under the perspective of news shock, fiscal policy rules and its macroeconomic effects analysis show that, neither news shock of technical or fiscal policies have significant influence on the current fiscal rules and different results of parameter estimation are not enough to change the current fiscal policy rules, which suggests that currently the public expectations for future shock are not enough to affect the government macro-control ideas, or expectations management in the current macro-control of the government play a substantial role. The system model after adding messages shocks is able to lead to the feature of co-movement of total macroeconomic variables such as output, investment, consumption and employment,which shows there exists expectation-driving economic cycle in our country. Besides,impacts of messages period changes of technology shocks on real variables and nominal variables in economic system are asymmetric. Macroeconomic effects of the fiscal rules differ in terms of the public expectation on single news and expectation on variety of news shocks.Lastly, this paper puts forward the corresponding policy suggestions to keep the stability of government debt scale and improve the effectiveness of macroeconomicregulation of fiscal policy based on the main conclusions above.