Abstract This paper analyzes the impact of government spending expansion on aggregate economy in China by using new Keynesian dynamic stochastic general equilibrium (DSGE) model and Bayesian estimation technique subject to Chinese 1999-2011 quarterly data. The results show that the expansion of government spending can not only increase output, but also induce a crowding-out effect on private consumption in the short term. Meanwhile, the dynamic responses of aggregate economy to demand shocks are significantly higher than that to supply shocks. Finally, by using sensitivity analysis it proves that the regulatory effects of government spending under the low consumption habit preference are significantly better than the effects under the high consumption habit preferences. Therefore, reducing the scale of government spending and consumption habits preference is a feasible way to achieve the balanced development of Chinese economy.
2014, Vol. 31 
