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Macroeconomic Effects of Government Spending in China

Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analyzed in this paper. We show that government spending in China (i) Granger-causes output, consumption and investment booms as well as inflation and (ii) has a multiplier larger than 1. The large multiplier effects are found not only in aggregate time-series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large multiplier found in China but also suggests that government spending is not necessarily a free lunch in spite of the large multiplier effects.

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DOI: 10.20955/wp.2013.013


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