Sign Restriction VAR Analysis About the Identification of Fiscal Policy and It's Explanation

Abstract

Compared with identification of monetary policy shocks, Identification of fiscal policies shocks are equally important, but there are insufficient in related research of China. Therefore, the paper chooses Sign Restriction to identify fiscal policies shocks of China. After we discuss identification conditions of fiscal policy shocks about foreign and domestic related research, then we adopt quarterly data from 1997Q1 to 2012Q4 to do a empirical analysis. By observing impulse results of business cycle shock and monetary shock, we find there is not a strong relationship between nominal variables, money supply, interest, and real variables, e.g. output, consumption; nominal variables response to fiscal policies shock are not significant. At the same time, real variables response to fiscal policies shock are also not significant in the short run, but the response are negative in the long run. China’s government expenditure has crowding-out effects toward.