Long-run and short-run budgeting for Taiwan and China: Evidence from panel data analysis

In this paper we use multivariate panel error correction models (PECMs) to investigate the long and short-run budgetary decision making of Taiwan and China over the 1965 to 2008 period. The empirical results show that, in the long run, for both Taiwan and China, government revenues and expenditures adjust towards budgetary balance supporting the fiscal synchronization hypothesis. In the short run, incrementalism occurs in both Taiwan and China. Although Taiwan and China have similarities in culture, language, and even in way of living, the two have vastly different government systems. Interestingly, the nature of the long run and short-run budgetary process for these two countries are surprisingly similar.