Abstract: In this paper, we investigate the effects of fiscal policy in different stages of business cycle based on a smooth transition vector auto-regression model, the results show that with the business cycle fluctuations, the effects of fiscal policy have changed significantly in China. Government spending has crowding-in effects on private investment in recessions, while it has crowding-out effects on private investment in expansions, which means that government spending has nonlinear effects on private investment. However, government spending has no nonlinear effects on output and private consumption. The effects of government tax on output, private consumption and investment tend to be stronger in recessions than in expansions, and government tax has nonlinear effects on private consumption. In the new normal period, the government could have a stable economic growth by increasing government spending and structural tax reductions, together with guard against long-term adverse effects of government investment and tax cuts.

Key Words: Fiscal Policy; Business Cycle; Smooth Transition Vector auto-regression Model; Government Spending; Structural Tax Reduction