Structural Fiscal Regulation and Choice of Instruments in the New Normal

Bian Zhicun (i’;t.#Y and Yang Yuanyuan (~:J.Ji}ji}j)2

School of Finance, Nanjing University of Finance & Economics, Nanjing, China
2
School of Economics, Nanjing University, Nanjing, China

Abstract: Based on the overall consideration of individual behaviors of Ricardian and non-Ricardian households, this paper develops a New Keynesian dynamic stochastic general equilibrium (DSGE) model to form a relatively systematic research framework for analyzing the economic effects of structural fiscal instruments. Our study findsthat great differences exist in the macroeconomic effects of different fiscal instruments, suggesting that the government should prudently select these fiscal instruments in fiscal macro-control . The simulating results of fiscal shocks show that the effect of tax cut is superior to the effect of increased spending. In the context of slowing economic growth and less potent stimulation
policy, the government should transform its previous regulatory approach of fiscal policy and shift from hefty spending stimulus policy to structural tax cuts. This paper believes that China should step up the implementation of public-private partnership, increase its spending on social security, healthcare, pension and public services and facilitate the transition toward a service-based government; and that tax policy should focus on structural tax cuts on consumption to promote the transition of demand structure toward consumption-driven.
Keywords: new normal, structural regulation, New Keynesian model, fiscal instruments JEL Classification: G38

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