Chapter 1 Business Cycles, Consumption, and Risk Sharing: How Different Is China?

Can standard business cycle methodology be applied to China? In this chapter, we address this question by examining the macroeconomic time series and identifying dimensions in which China differs from economies (such as Canada and the United States) that are typically the subject of business cycle research. We show that naively applying the standard business cycle tools to China is no more ridiculous than applying it to Canada, although the dimensions along which the model struggles is different. For China, the model cannot account for the low level of consumption (or high saving) as a proportion of income observed in the data. An examination of provincial level consumption data suggests that the absence of channels for intranational consumption risk sharing may be an important reason why the business cycle model has trouble accounting for Chinese consumption and saving behavior.