Empirical result 1

Two types of decentralization variables, economic and fiscal, are found to be

positive and highly significant (at the 1% or 5% level) in both the GNP growth
and inflation equations.
The economic decentralization variable is significant at 1% level in the GNP
growth equation. While in the inflation equation, it is significant at 5% level.
The strong association between economic decentralization and GNP growth
supports the view that the institutional change toward a more competitive
market has been a cause of growth in China.
The fiscal decentralization variable is relatively more significant at 5% level in
both equations. The similarly strong association between fiscal
decentralization and inflation favors the view that fiscal federalism often
leads to inflation.
In the GNP growth equation, all other variables are significant (at the 1% or
5% level).
In the inflation equation, both GNP variables are not significant; hence, we
can conclude that GNP does not have influence on inflation.
Empirical result 2

Empirical result 3
 Empirical result 4

Empirical result 5
In the GNP growth equation, the single decentralization variable is significant at 1%
level. And then, all other variables are also significant at the 1% or 5% level.
In the inflation equation, the single decentralization variable is also significant at 1%
level. Nevertheless, both GNP variables are not significant.
 Empirical result 6
In the GNP growth equation, the single decentralization variable is significant at 1%
level. Then, both GNP variables are also significant but not the other way around for
both inflation variables.
In the inflation equation, the single decentralization variable is significant at 1% level.
Then, both inflation variables are also significant but not the other way around for both
GNP variables.
 Modified empirical result
Interpretations:

Modified model (a):

Economic decentralization is positive and significant at 5% level for both equations.
Interaction between economic decentralization and reform dummy is positive but not
significant in both equations.
Fiscal decentralization is positive but not significant for both equations.
Interaction between fiscal decentralization and reform dummy is negative and not significant
in both equations.

Modified model (b):

Economic decentralization is positive and significant at 5% level for both equations.
Interaction between economic decentralization and reform dummy is positive but not
significant in both equations.
Fiscal decentralization is negative in GNP equation while in inflation equation is positive.
However both decentralization are not significant in both equations.
Interaction between fiscal decentralization and reform dummy is negative and not significant
in both equations.
Mit-1 is positive and significant at 1% level while for M1t-2 is positive but not significant in
inflation equation.
Interaction between Mit-1 and reform dummy is positive but not significant and while for
Interaction between Mit-2 and reform dummy is negative and significant.
 Modified empirical result 2
Continue
Modified model (c)
Economic decentralization is positive and significant at 1% level in GNP equation but
not significant in inflation equation.
Interaction between economic decentralization and reform dummy is negative in
GNP equation and positive in inflation equation. In both equation, it is not
significant.
Fiscal decentralization is positive but not significant for both equations.
Interaction between fiscal decentralization and reform dummy has different sign for
both equations and it is not significant for both equations.
Modified Model (d)
Economic decentralization has positive sign for both equations. However, it is
significant at 1% level in GNP equation but not significant in inflation equation.
Interaction between economic decentralization and reform dummy is negative in
GNP equation and positive in inflation equation. In both equation, it is not
significant.
Fiscal decentralization and Interaction between fiscal decentralization and reform
dummy are positive but not significant for both equations.
 Modified empirical result 3
Continue
Modified Model (e)
Single decentralization variable has positive sign for both equations. And then, it is
significant at 1% level in GNP equation and 5% level in inflation equation.
Interaction between ingle decentralization variable and reform dummy is positive
but not significant for both equations.
Modified Model (f)
Single decentralization variable has positive sign and significant at 5% level in both
equations.
Interaction between ingle decentralization variable and reform dummy has positive
sign for both equations. And then, it is significant at 1% level in GNP equation and
5% level in inflation equation
 Empirical Results
Following figure presents the dynamic responses of growth and inflation to shock on decentralization.
The effect on growth as well as inflation is found to
be persistent. The impact on growth is significantly
positive over a period of 23 years after the shock,
while the effect on inflation is significant over a
period of up to 6 years.
Then, they are tempted to ask what the levels of
growth and inflation would have been if there had
been no decentralization efforts in the Chinese
economy after 1972.
This issue is particularly important for the inflationary effects of decentralization caused by fiscal policy changes.
One might argue that, in the absence of decentralization, inefficient state firms would have accumulated
economic losses that ultimately would have caused a fiscal problem for the central government. This problem
might have led to increased monetization and hence inflation.
In order to answer the question, they simulate the hypothetical series of growth and inflation rates that would
occur if the impacts of the decentralization shocks were completely removed from the actual series.
The results are shown as follows. It indicates that inflation as well as growth would not have been as high
without decentralization as they actually were in late 1980s and 1990s.
 Empirical Results (13)
Their models implicitly assume that the Chinese economy has been reacting to decentralization in
the same manner before and after the reform.
To determine whether this assumption is consistent with the data, they conduct tests for a
structural break in 1979. The standard Chow test based on Model (d) cannot reject the null
hypothesis of no structural break.
Similar results are obtained for the other models using likelihood ratio tests. These results are
particularly interesting when compared with the results obtained when the VAR does not include
any decentralization variables. The Chow test statistics without decentralization variables are
larger than the critical value at the 5% level. Failure to include decentralization indicators would
therefore lead to erroneous conclusions supporting a structural break in 1979.
Given little evidence of structural change in the entire process, then they investigate the
possibility of a change in the impact of decentralization on the economy after 1979. To test this
assumption they modify the Models (a)(c) by replacing ij with i + ijdt-1 for i = 1, 2 and j = 1, 2 in
Eq. (1), where dt is a reform dummy defined by dt = 1 for t 1979 and = 0 otherwise. In all
modified models except for Model (f), they find no interaction terms with the reform dummy to
be significant.
They take an additional step to examine how relevant the past history of the Chinese economy
can be for forecasting the countrys post-reform macroeconomic performance.
More specifically, they would like to see whether the inflation and economic growth of the 1980s
and 1990s could have been forecast, based on the known effects of decentralization up to the
1970s.
The forecasts based on the pre-reform data would perform poorly if there were a dramatic
structural break around 1979.