Maintaining the Proper Range of Economic Growth and Non-linear Fiscal Policy - Analysis based on the Contingent Constraint Model, a paper co-authored by our school’s Associate Professors Peng Yuchao, Yan Lili and Fang Yi, was lately published in the 2019 1st Issue of China Economic Quarterly.
Since reform and opening up, the Chinese economy has maintained an average two-digit high-speed growth. The nation with a 1.3-billion population has become a middle-income country and created the “China Miracle”. However, the process of economic development is not all smooth sailing. In face of cyclical changes in global economic situations, Party and government leaders have made difficult policy choices at the crossroads of economic development time after time. Strong stimulus policies centered on fiscal expenditure launched to ensure the proper range of economic growth in unconventional times are called unconventional fiscal policies in the paper. In contrast, mild and regular counter-cyclical fiscal policies implemented by the government when economic growth rate moves within the target range (namely in conventional times) are called conventional fiscal policies. How are the effects of unconventional fiscal policies? What are their impacts on other aspects of the macro economy? This paper will answer these questions.
It portrays the unconventional fiscal policies designed to maintain the proper range of economic growth through the contingent constraint model, and analyzes the transmission mechanism, effects and externalities of such policies. It finds through research that unconventional fiscal policies can attain the target of ensuring economic growth, but at the cost of squeezing out private sector investments, and leading to a decrease in the share of consumption in demand structure and a rise in the share of industry in industrial structure. By comparing the policy effects on two occasions, it finds that the unconventional fiscal policy adopted in 1998 remarkably promoted economic stability and efficiency, whereas the one launched in 2009 significantly suppressed economic efficiency and hence aggravated total social benefits although it facilitated economic stability. One reasonable explanation is that the marginal positive externalities of government investments continue to decline while the marginal negative externalities of industry continue to rise. The result of policy frontier curve analysis shows that the expansionary fiscal policy mix dominated by “tax cuts” can better fulfill the stabilization of growth and structural adjustments when system and population dividends diminish, resource constraints tighten, and global economic recovery slows down.
Compared with existing studies, this paper has made the following marginal contributions: First, it uses the non-linear DSGE model to portray unconventional fiscal policies designed to maintain the proper range of economic growth, which helps academic circles to conduct scientific and rigorous analysis of unconventional fiscal policies using macro theoretical models. Second, it evaluates and compares the effects of unconventional fiscal policy launched in 1998 and 2009, filling in the gap in existing studies. Third, it introduces the economic efficiency target in carrying out policy evaluation, which provides the theoretical basis for the transformation of economic structure. Fourth, guided by the two-dimensional targets of economic stability and efficiency, it explores the optimal expansionary fiscal policy mix with the advanced policy frontier curve analysis, and reaches the conclusion that such policy mix varies with different marginal externalities of government investment and industry.
