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Macro Regime and Economic Growth in China

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  • Yuwen Dai
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    Abstract

    In this paper, we investigate the relationship between Chinese macroeconomic policy and economic growth, and examine how the choice of macroeconomic regime affects economic performance in China. An open-economy model is developed for this purpose. It is a three-sector “almost small" open-economy macroeconomic model, with asset markets and forward-looking agents. This open-economy model is then adopted to analyse the implications of both domestic and external growth shocks to the Chinese economy under two alternative macroeconomic policy regimes. These policy regimes have two extreme assumptions on the exchange rate, with differing degrees of financial capital mobility. The simulation results show that greater flexibility in the exchange rate regime allows the central bank to conduct independent monetary policy in the Chinese economy, the benefit from which increases as financial capital becomes more internationally mobile. Most growth shocks cause an expansion in the real GDP level, and there is a deflation in the price level and depreciation in the real exchange rate when the economy operates a floating exchange rate regime with high financial capital mobility. Overall, the expansionary effects in this macroeconomic environment will be beneficial to the Chinese economy.

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    Bibliographic Info

    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_015.

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    Length: 28 pages
    Date of creation: Jun 2007
    Date of revision:
    Handle: RePEc:deg:conpap:c012_015

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    Related research

    Keywords: Macroeconomics; Economic Growth; Monetary Policy; Exchange Rate; Capital Mobility; Chinese Economy; Computable General Equilibrium (CGE) Modelling;

    This paper has been announced in the following NEP Reports:

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    1. Rod Tyers & William Coleman, 2005. "Beyond Brigden: Australia’s Pre-War Manufacturing Tariffs, Real Wages and Economic Size," ANU Working Papers in Economics and Econometrics 2005-456, Australian National University, College of Business and Economics, School of Economics.
    2. Gregory C. Chow, 2004. "Economic Reform and Growth in China," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 127-152, May.
    3. Rees, Lucy & Tyers, Rod, 2004. "Trade reform in the short run: China's WTO accession," Journal of Asian Economics, Elsevier, vol. 15(1), pages 1-31, February.
    4. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
    5. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December.
    6. Lucy Rees & Rod Tyers, 2004. "On the Robustness of Short Run Gains from Trade Reform," CEPR Discussion Papers 474, Centre for Economic Policy Research, Research School of Economics, Australian National University.
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