Study On The Effects Of China’s Fiscal Policy Based On The New Keynesian DSGE Model

Fiscal policy is one of the two main tools of macroeconomic regulation and control,The effects of fiscal policy have therefore become one of the key elements of domesticand international economic scholars, and have always been the focus of debate as well asthe important reference of macro policy formulation,But so far a few of commonconclusions have been gotten.Since1992, China has experienced a few macroeconomicvolatility, According to the different stages of economic development the governmentimplemented different fiscal policy. In the second half of2008, in order to cope with theinternational financial crisis, China adopted a new round of expansionary fiscal policy,Sothe study on the effects of fiscal policy is a hot issue. What are the effects of fiscal policyin China in the end? And what is the transmission mechanism? What is the relationshipbetween fiscal policy and monetary policy, and How to they cooperate or coordinate inorder to stabilize the economy and promote the economic growth? The answers to thesequestions have important significance in the theory and practice.In recent years, the effects of china’s fiscal policy have been extensively studied fromthe perspective of theoretical and empirical, but there are also flaws andshortcomings.Based on the analysis of the results of previous studies and foreign studies,This dissertation applies the new Keynesian Dynamic Stochastic General EquilibriumModel (DSGE) to study China’s fiscal policy effects. Through empirical study, thisdissertation draws some meaningful conclusions:First, the fiscal and monetary policies of China which use fiscal expenditure andmoney supply as the main policy tool has a significant stabilizing effect.This conclusionnot only supports the Keynesian view, but also is consistent with our actual experience.Therefore, during the recession, expansionary fiscal policy and monetary policy can beimplemented to prevent the decline in aggregate demand and increase employment at the same time. On the contrary, contractionary macroeconomic policy can be implemented inan overheated economy.Second, the expansionary fiscal policy that increases fiscal spending might producecrowding-out effect on the private sector. This paper shows that an increase in governmentspending financed by higher future taxes will lead to a reduction in consumption whichcoincides with macroeconomic theory.and the result is associated with the assumption ofthe model to consumers,that is Ricardian consumers. After the financial crisis in2008, theexpansionary fiscal policy stabilized China’s economy rapidly, next fiscal policy aims topromote consumption,and transform China’s economic growth pattern from excessivedependence on investment and exports to relying on domestic consumption, Therefore,further study has a profound significance.Third, expansionary fiscal and monetary policies will also have consequences that arenot conducive to sustained and stable economic development. This paper also shows thatthe expansionary Macroeconomic policy will lead to rising inflation. Therefore, when thegovernment intervene macroeconomic, it must be alert to inflation risk that might arise,and switch policy timely.Fourth, On the assumption of certain fiscal policy rules and monetary policy rules,China’s fiscal-monetary policy interactions tend to counteract each other over the cycle.The simulation results show that the substitutability of fiscal and monetary policy doesn’tdepend on the types of shocks hitting the economy.So,we argues that it is important toanalyze the nature of shocks in the economy in order to select the appropriate policycombination.