Time†varying volatility in the Chinese economy: A regional perspective

This paper documents important changes in the Chinese macroeconomic environment over the last three decades. The volatility of Chinese aggregate economic activities has fallen dramatically by nearly 60 per cent during its reform period, a phenomenon that coincides with the ‘Great Moderation’ that occurred in most industrialized economies. We employ a provincial panel†data method to investigate the driving forces of the increasing macroeconomic stability in China. We examine the empirical relationship between output volatility and various economic, policy, institutional, and demographic factors. Our results suggest that the acceleration of reform toward the market economy, which began around 1994, generally leads to a widespread output volatility reduction across Chinese provinces. Both state†owned enterprise reform and human capital accumulation are important determinants of output volatility since the mid†1990s; they play an important role in explaining the provincial differences on volatility reduction.