Estimating the international spillover effects of China’s fiscal policy: A global VAR analysis

Abstract

We examine the international spillover effects of China’s fiscal policy. A global vector autoregressive (GVAR) model is used for this purpose. First, we demonstrate robustly that China’s government spending stimulates domestic private consumption. Second, we show that achieving a primary budget surplus by the Chinese government stimulates the output of several regions in the world. These results imply that while government spending in China is a useful stimulus measure from a domestic perspective, fiscal rectitude in China during normal times can be justified in the long run from an international perspective.