The dynamics of fiscal policy: Insights from China's macroeconomic indicators

Abstract

This paper examines the impact of China’s fiscal policy on macroeconomic performance during the 2008–2009 global financial crisis, focusing on whether government spending affected output and inflation dynamics. Using monthly data from 2001 to 2010, we apply a vector autoregression (VAR) framework with Johansen cointegration and impulse response analysis to evaluate the short- and long-term relationships between fiscal expenditure, GDP, the Consumer Price Index (CPI), and the Producer Price Index (PPI). The findings indicate that fiscal policy had a limited effect on short-term GDP growth but significantly influenced inflation, with government spending acting as a stabilizing tool for both consumer and producer prices. These results highlight the role of fiscal instruments in price stabilization when monetary policy is constrained. The study offers relevant policy insights for emerging economies seeking to maintain macroeconomic stability during global shocks through inflation-sensitive fiscal strategies.