Topic: Fiscal Policy volatility and capital misallocation: Evidence from China

Lecturer: Wei JIANG, Associate Professor, School of International Business of SWUFE

Time: 3:00-5:00 p.m. December 12th, 2019 (Thursday)

Venue: B423, Zhixin Building

Abstract: Can domestic policy uncertainty originated from discretionary fiscal policy be a driver of capital misallocation in China? Using cross-province data, we find a positive effect of fiscal policy volatility on the dispersion of risk adjusted marginal revenue product of capital (MRPK), and the changes of fiscal policy volatility account for 8.9% to 27.4% of the observed reduction in capital misallocation during 1998-2007. Factors relating to capital adjustment costs, financial frictions and policy distortions are found to play an important role in shaping the nexus between fiscal policy volatility and the static measure of capital misallocation, as reflected by the vast heterogeneity among provinces and industries. The impact of fiscal policy volatility on capital misallocation can transmit to the dispersion of marginal revenue products of other factor inputs.