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Rebalancing China's Economy; What Does Growth Theory Tell Us?

  • Jahangir Aziz
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    This paper uses the standard one-sector neoclassical growth model to investigate why China's consumption has been low and investment high. It finds that the low cost of capital has been quantitatively an important factor. Theory predicts that the price of capital may have been significantly distorted in the 1990s and 2000s. The distortion could have been caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending. If China is to rebalance growth towards relying more on consumption and less on exports and investment, banking sector reforms and financial market development could, therefore, turn out to be key.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/291.

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    Length: 34
    Date of creation: 01 Dec 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/291
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    6. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
    7. repec:ttp:iibwps:08 is not listed on IDEAS
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    17. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
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