Journal
INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
Volume 74, Issue -, Pages 392-404Publisher
ELSEVIER
DOI: 10.1016/j.iref.2021.03.019
Keywords
Fiscal transfers; Vertical fiscal imbalance; Fiscal sustainability; Fiscal space
Categories
Funding
- National Social Science Fund of China [19CJL011]
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The study reveals that the fiscal behaviors of local governments in China are unsustainable, but fiscal sustainability can be achieved through fiscal adjustments despite fiscal fatigue. Furthermore, the impact of transfer payments from the central government on fiscal sustainability depends on the degree of vertical fiscal imbalance.
This paper measures fiscal sustainability of local governments in China and analyzes the effects of vertical fiscal imbalance and transfer payments on fiscal sustainability under the framework of Chinese-style fiscal decentralization. We find that the current fiscal behaviors of local governments in China are unsustainable, but most local governments have sufficient space to establish a positive fiscal feedback mechanism through fiscal adjustment to achieve fiscal sustainability in spite of the existence of fiscal fatigue. Moreover, the effect of transfers from central government on fiscal sustainability depends on the degree of vertical fiscal imbalance. More specifically, the transfers have a negative impact when the vertical imbalance is low, and have a positive impact when it's high. Finally, these results are robust to alternative model specifications and endogeneity issues.
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