How Did Fiscal Policies Affect the Business Cycle Volatility in China?

This article presents an empirical study of the effect of fiscal divergence on the business cycle volatility at the provincial level in China. We use the model of Darvas, Rose, and Szapáry (2007) and Furceri (2009) to examine this relationship. We find that there is a positive and statistically significant relationship between the fiscal divergence and business cycle volatility across China. Our empirical results are robust with respect to the different measures of fiscal divergence and the different detrending methods. Results show that provinces with similar government budget positions tend to have smoother business cycles in China. [ABSTRACT FROM AUTHOR]