Can proactive fiscal policy achieve the goal of “Beyond Keynesianism”?

Abstract

AbstractThis study aims to assess whether counter‐cyclical fiscal policy to release infrastructure bottlenecks achieved the goal of “Beyond Keynesianism,” that is, to stimulate long‐term economic growth. The proactive fiscal policy during the Asian financial crisis dramatically expanded the National Highway System in China. Taking the highway project as an example, we evaluate its impact on per capita output and employment growth and investigate the underlying mechanism. Using provincial panel data from 1995 to 2016, our system generalized method of moments estimation finds that this large‐scale high‐rank road infrastructure project leads to an increase in per capita GDP growth. Automobile‐intensive industries benefit most from it. A channel analysis indicates that the growth effect is driven by structural transformation. Further, the project increases overall employment, mainly in secondary industries. It also creates extra demand for road transportation and longer‐distance road freight transport by facilitating the flow of both commodities and passengers.