The Research Of The Non-Linear Effect Of Chinese Fiscal Policy

In the past three decades, China’s macroeconomic situation fluctuates a lot, fiscal policy has taken the leading role in the policy decisions and discretionary fiscal policy was frequently applied. In this process the use of fiscal policy in China has shown great flexibility. The traditional Keynesian assumption of a linear fiscal policy cannot interpret the real economic situation in China perfectly. In this article possible intervals of the non-linear fiscal policy will be divided and analyzed, so that the regular patter of China’s fiscal policy can be deduced. This study is of great significance to enhance the predictability, focalization and effectiveness of China’s fiscal policy. The research work was conducted in three steps.Firstly, based on the domestic and foreign scholars’relevant theoretical and empirical studies, theories and models of "Keynesian effects" and "non-Keynesian effects" were summarized. Secondly, volatile parts in the real output were decomposed and further analyzed in combination with of the change of fiscal policy in recent years, so that the practical effects of discretionary fiscal policy can be illustrated. Overall speaking, the use of fiscal policy of our country shows following three features:frequent change of policy direction; large scale and great intensity of macroeconomic regulations and great deviation between policy intension and policy effects. Why does this apparently wise fiscal policy always appear as tangled? Does our fiscal policy show nonlinear effect? Upon this assumption the article selects annual data from 1953 to 2013 to evaluate nonlinear effects of fiscal policy on output growth by building Markov switching model.The empirical results show that our fiscal policy reflects nonlinear effects:before the reform and opening up, non-Keynesian effects existed significantly, but mainly stem from taxes and purchase expenditures; transfer payments in different periods show characteristics of linear effects; in the observed period, the fiscal policy of our country shows significant Keynesian effects, which means expansionary fiscal policy does stimulate the growth of output, and the stimulation effects present for a long time. Finally, using the macroeconomic models with quantity rationing from Muellbauer and Portes, I get the result that the shortages of both China’s commodity and labor markets are the primary causes of the non-linear effects of fiscal policy. To make fiscal policy work more efficiently and effectively, the government should take the demand and supply changes of labor market into consideration.