Fiscal Rules, Macroeconomic Stability, and Fiscal Governance Performance: An Empirical Study Based on the Logic Underlying Local Governments' Fiscal Behavior

Empirically identifying how local governments' fiscal instruments respond to the economic objectives of fiscal intervention, based on the logic underlying local governments' fiscal behavior, can enhance the quality and effectiveness of local fiscal governance while improving the effectiveness of fiscal policy in promoting macroeconomic stability. After elucidating the logic underlying fiscal behavior as local governments perform the functions of developmental government under a fiscally decentralized system, this article uses provincial-level data from China for 2010–2023 and applies a dynamic panel GMM model and a time-varying parameter vector autoregression (TVP-VAR) model to empirically examine the responses of Chinese local governments' fiscal instruments to the economic objectives of fiscal intervention, as well as their provincial heterogeneity and time-varying characteristics. The results show that both local fiscal expenditure and fiscal revenue respond systematically to the objectives of closing the output gap and maintaining fiscal sustainability, but exhibit provincial heterogeneity, driven mainly by differences in provinces' stages of economic development and their preferences for adjusting different fiscal revenue and expenditure instruments. The responses of local fiscal expenditure and revenue to the objectives of closing the output gap and maintaining fiscal sustainability also exhibit time-varying characteristics; comparatively, such characteristics are more pronounced in responses to fiscal sustainability measured by fiscal deficits and real government debt. This study provides policy implications for optimizing local government behavior and improving China's fiscal governance.