Volatility and Economic Systems: Evidence from A Large Transitional Economy

This is the �rst paper to study the role played by economic transition in reducing output volatility. A dramatic decline in aggregate output volatility in China from central planning to market-oriented reforms in the past half century is documented in this paper. The output volatility measured by the standard deviation of real gross domestic product (GDP) growth over the speci�ed rolling windows declined by 73% from 1953-�1977 to 1978�-2008. The sharpest reduction occurred in 1978 when China began to initiate a series of market reforms. Since the inception of these reforms, the volatility continued to decline, dropping more than 30% from 1978-�1994 to 1995�-2008. During the planning period, the co-movements in the provincial output, which re�flected the systemic risks associated with the highly centralized economic and political systems in China, were found to be the primary source of the high output volatility.