Deck 10: Public Finances and Fiscal Policy in Action

Question 1

Go to FRED (the Federal Reserve Economic Database) and update the chart, "General Government Gross Debt for China."

Answer 1

The first chart is the official estimate. The second two provide deficit and debt measures which include (augmented) local government borrowing.
The above two graphs are from IMF Working Paper 14/4 and show China's public debt levels and deficits as a share of GDP.

Question 2

Decentralization of government spending and taxing has always been a central tenet (a basic principle) for guiding public finances (government spending and taxation). Describe what issues arise with decentralization in China's system of public finances.

Answer 2

The central issue is that while expenditures have been decentralized (including mandated expenditures from the central government) revenue collection (taxes) is highly centralized. This has created a financing deficit for local governments-especially related to infrastructure spending. Thus local governments (provinces and downward localities) have come to rely more on land sales, bank and trust finance, and bonds. This has created concerns regarding financial stability (the potential for default) by some of the local governments. In turn, the central government would need to step in.

Question 3

Consider fiscal policy responses to the great financial crisis of 2008-09.
a. Explain the different fiscal policy responses in the United States and China to the Great Recession of 2008-09.
b. Explain whether the short-run policies in (a) are consistent with the longer-run goals of each country.

Answer 3

a.Arguably, the United States needs to increase savings and increase investment; China needs to decreases savings and investment and increase consumption. The responses to the Great Financial Crisis moved both countries in the opposite (wrong) direction relative to these long-run goals.
b.Arguably, the United States needs to increase savings and increase investment; China needs to decreases savings and investment and increase consumption. The responses to the Great Financial Crisis moved both countries in the opposite (wrong) direction relative to these long-run goals.

Question 4

Compare and contrast monetary policy responses to the Great Recession of 2008-09 in China and the United States.

Question 5

Based on estimates of China's Taylor rule response function (as described in Chapter 9), compare and contrast China's and the United States' likely policy responses to future inflation and output shocks.

Question 6

It is argued in this chapter that fiscal and monetary policies are more likely to have an immediate impact in China than in the United States. Explain.

Question 7

With respect to the relationship between provinces (states) and the central government, compare and contrast China and the United States in terms of a global, multinational, or transnational structure.

Question 8

Revenue sharing in the United States mainly involves federal revenue sharing with individual citizens at the local level. In China, revenue sharing mainly involves intra-governmental transfers. Discuss.
a. Explain why there is a difference.
b. Explain the different implications for consumption and investment.

Question 9

Based on what you have learned in this chapter, explain why there are such great tensions over land rights at the local level in China.

Question 10

What are the major challenges for the Chinese economy in the coming years? Compare and contrast with those of the United States.