Unraveling the Nexus Between Fiscal Decentralization, Innovation, and Sustainable Economic Performance in China

Abstract

For many years, academics have actively debated the connection between efficiency and fiscal decentralization. The impact of fiscal decentralization and other elements on sustainable economic development has been disregarded in a number of studies. Thus, the purpose of this study is to examine how fiscal decentralization affects China's long-term economic growth from 2005 to 2016, taking into account a number of important control variables. We employ quarterly time series data and suitable econometrics methods (such as Bootstrapped Quantile Regression) for long-run relationships in order to examine the case of the Chinese economy. We also track changes in the variables over time, which is helpful for the empirical evidence. The long-term relationships between the selected variables are validated by the panel cointegration tests. Sustainable economic development is mostly influenced by fiscal decentralization. Using innovation as a control variable helps China's economy grow. Moreover, the findings verify that financial risk, the interaction of fiscal decentralization and innovation, and the interactive term of fiscal decentralization and financial risk, all lead to a decline in China's economic progress. These findings appear to have credible policy implications.JEL Classification: E44, Q01, G32, C10.