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Macroeconomic Control in the Transforming Chinese Economy: An Analysis of the Long‐Run Effect
Author(s) -
Fung Michael K. Y.,
Ho WaiMing,
Zhu Lijing
Publication year - 2001
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.00119
Subject(s) - economics , inflation (cosmology) , interest rate , monetary policy , dual (grammatical number) , monetary economics , real interest rate , context (archaeology) , financial repression , macroeconomics , chinese economy , endogenous growth theory , fiscal policy , government (linguistics) , nominal interest rate , control (management) , market economy , china , art , paleontology , linguistics , philosophy , physics , literature , theoretical physics , political science , law , biology , human capital , management
This paper analyzes the issue of macroeconomic control in the Chinese economy where there is a dual structure (consisting of a state sector and a non‐state sector) and the financial sector is still under tight control by the government. Given the dual structure and financial repression, when inflation is a severe problem, the authors investigate whether it is possible for the government to bring inflation under control without hampering long‐term economic growth performance. The investigation is conducted within the context of an endogenous growth model that incorporates the two major institutional features of the transforming Chinese economy. The paper evaluates the long‐run effects of changes in government monetary and fiscal policies on the major macroeconomic aggregates. The analysis suggests that increasing in the interest rate on government bonds will reduce inflation without affecting the growth rate of output; while increasing the nominal interest rate on bank deposits will exert a stagflationary effect on the economy: raising the inflation rate but reducing the growth rate of output.