The Economic Effects Of China’s Active Fiscal Policy: Theoretical Analysis And Empirical Test

Since1998, our economy have suffered from the negative impact of the Asianfinancial crisis and the global economic crisis caused by subprime mortgage crisis. Inresponse, the central government implement active fiscal policy through bonds issueand expanding government spending.Under the cooperation of monetary policy, theimplementation of active fiscal policy ensures that China’s growth rate has kept morethan8%in the past ten years. But some structural contradictions in our economy hasnot been changed, one of the most prominent is the high investment rate and weakdomestic demand.This directly leads to the formation of reliance on external market,and makes our economy vulnerable to external shocks. Therefore, it is of importantpractical significance to the future macroeconomic regulation and control to make acomprehensive evaluation on the practice of the active fiscal policy in China since1998, clarify its dynamic effect on China’s macro economy, and especially clearwhether active fiscal policy is efective to boosting domestic demand and substitutinginvestment demand and foreign demand.Based on carding the related research both at home and abroad, this paper built adynamic stochastic general equilibrium (DSGE) model for theoretical analysis andgot the figure of dynamic effect of national debt spending changes to our macroeconomy through parameters calibration and numerical simulation.Results show that(1) increased government spending can effectively drive the growth of output in theshort term;(2) increased government spending will cause consumer spending toincrease in the short term, but decrease in the long run;(3)increased governmentspending makes a slight drop in private investment at first and then a rise until returnto the steady state.Then, this paper makes a empirical test on the results of theoreticalanalysis through VAR model. Results show that the increasing of national debtspending in our country makes output rise in the short term, consumer spending alsorise and private investment rise at first and then fall. But the shock is temporary andthe intensity of the shock is small and is difficult to have lasting and stable effect ondomestic demand. The results of empirical test are in accord with the theoreticalanalysis.This paper also try to give a economic explaination to the results of theoreticalanalysis and empirical test from two aspects: the inherent problems of fiscal policyand the external institutional constraints.And then put forward corresponding policysuggestions: one is to make better use of positive fiscal policy to rensure steadygrowth, the second is to further strengthen the role of positive fiscal policy inexpanding consumer spending. Finally, this paper pointed out the directions of furtherstudy.