Correlation Effects of Fiscal and Monetary Systems: Construction of China’s Modern Fiscal, Tax, and Financial Systems

Abstract

Mainstream theories have not sufficiently explored the organic connection between fiscal and monetary systems. The requirement to establish a modern fiscal, tax, and financial system necessitates a more profound understanding of the interrelated effects between fiscal and monetary systems. This paper, based on a comprehensive analytical framework for fiscal influence on the monetary system, explores the institutional foundation, transmission channels, and regulatory capabilities through which the fiscal authorities affect monetary circulation. There are three findings. First, the Treasury Single Account (TSA) system, the capital contributor responsibility system with the fiscal authorities fulfilling responsibilities as the capital contributor for state-owned commercial banks, and the fiscal credit system endow fiscal authorities with the ability to influence money creation. Second, fiscal authorities exert a significant influence on the monetary market: With regard to money supply, treasury deposits are a vital factor influencing the broad money, and the impact of treasury deposits on money supply exhibits significant cyclical characteristics; And in terms of public financial product production, over the past decade, the proportion of fiscal credit relative to commercial credit has been on the rise, with 11.04% to 31.29% of loans from financial institutions in 2022 categorized as fiscal credit. Third, relevant authorities have employed open market operations to counteract disturbances from treasury revenues and expenditures, have utilized structural monetary policy tools in conjunction with fiscal production of public financial products, expanded government bond space through the characteristics of state-owned financial capital as a fiscal contributor, and supported the central bank’s macro-prudential management through their role as the capital contributor for state-owned commercial banks.

Keywords

public finance / money creation / “dual-entity” system for monetary regulation / modern fiscal, tax, and financial system

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Higher Education Press