Consumption-Crowded Public Goods Model and the Optimal Size of China's Fiscal Expenditure: 1978-2006

Abstract

From the perspective of maximizing the economic growth rate, this paper examined the optimal size of China’s fiscal expenditure with theoretical and empirical methods. First, the paper established a Consumption-Crowed Public Goods Model, based on which it further estimated that during the period of 1978-2006, China’s optimal size of fiscal expenditure is about 18.6-22.3 percent of GDP. Judging by this optimal criterion, it finally divided China's policy development into three stages: (1) the higher-size stage (1978-1992); (2) the lower-size stage (1993-1999); (3) the optimal-size stage (2000-2006).