An Empirical Analysis of the Relationship between Shanghai's Economic Growth and Fiscal Expenditure

Abstract

There are three viewpoints towards the relationship between fiscal expenditure and economic growth. The first type is that fiscal expenditure improves the economic growth, the second is that fiscal expenditure holds up the economic growth. While the last type of viewpoint is that fiscal expenditure makes no difference on the economic growth. The paper will do the empirical study on the relationship between fiscal expenditure and economic growth of Shanghai by VAR model. The result shows that fiscal expenditure is not the Granger Cause of economic growth. While under the 1% significance level, the economic growth is regarded to be the Granger Cause of fiscal expenditure. It means that the increase of Shanghai fiscal expenditure decreases consumer expenditure and investment, which makes fiscal expenditure have no effect on the output. To avoid the crowding-out effect, the government needs to get the optimum fiscal expenditure and consider to limit the financing activity of private departments so that private investment will not be crowded out.