Fiscal policy, monetary conditions and macroeconomic risks: evidence from China

Abstract

We employ a novel structural quantile vector autoregression model to examine the effects of fiscal policy on macroeconomic risks in China and to investigate how monetary conditions shape these effects. Our results uncover that fiscal stimulus reduces output downside risk and leads to upward risk to inflation by consistently driving up the medians and tails of the distributions of output growth and inflation. The results also reveal the presence of structural asymmetries and time-varying characteristics in the transmission of fiscal policy to the system. Notably, an easing of monetary conditions further amplifies longer-term effects of fiscal policy on both output growth and inflation.