Trends and Cycles in China's Macroeconomy

Abstract

This working paper was written by Chun Chang (Shanghai Jiao Tong University), Kaiji Chen (Emory University), Daniel F. Waggoner (Federal Reserve Bank of Atlanta) and Tao Zha (Emory University and Federal Reserve Bank of Atlanta).

Although the non-financial corporate sector accounts for the lion’s share of the post-Global Financial Crisis. We make four contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic research on China. Second, we document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. Fourth, the model’s mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive of Chinese characteristics. We argue that preferential credit policy for promoting heavy industries accounts for the unusual cyclical patterns as well as the post-1990s economic transition featured by the persistently rising investment rate, the declining labor income share, and a growing foreign surplus. Th e departure of our theoretical model from standard ones offers a constructive framework for studying China’s modern macroeconomy.

Keywords: Reallocation, between-sector effect, TFP growth, heavy vs. light sectors, long-term vs. short-term loans, labor share, lending frictions, incentive compatibility

JEL Classification: E, F4, G1