FTPL with Multi-tier Government in Fiscal Federalism: Theoretical Analysis and Empirical Tests
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| Title | FTPL with Multi-tier Government in Fiscal Federalism: Theoretical Analysis and Empirical Tests
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| Author | Zhao Wenzhe, Dong Lixia and Lu Di |
| Organization | Department of Economics, Central University of Finance and Economics; Tsinghua University School of Economics and Management;The School of Oriental and African Studies (SOAS) - University of London, Department of Economics, Renmin University of China |
| Email | wenzhe07@yahoo.com.cn； |
| Key Words | Fiscal Federalism; Government Tiers; FTPL; Inflation; The Price Level |
| Abstract | The paper researches whether FTPL is valid in Chinese-style fiscal federalism after the tax-sharing reform. We address this question theoretically and test it using Panel VAR model. We use a multi-tier government model to construct a FTPL model in fiscal federalism of Chinese style, where the local government can’t make budgetary balance, instead it’s budget constraint is made balance through transfer payments from the central government and loans from commercial banks, while the central government has the right to issue government bonds to finance deficit and realize intertemporal budgetary constraint balance. This paper shows that a decrease of the local government’s surplus could raise the equilibrium price level even without the monetary supply increasing; both the centralization of fiscal revenue and fiscal competition between local governments will increase the price level because it stimulates the fiscal free-riding behaviour of the local government. Therefore, in Chinese-style fiscal federalism, local fiscal authority plays important role in the price level determination, so that fiscal free-riding behaviour of local governments is easy to lead to the price level fluctuant. |
| Serial Number | WP206 |
| Time | 2012-02-15 |
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