Unveil the Economic Impact of Policy Reversals: The China Experience

China Finance Review International, Forthcoming

32 Pages Posted: 23 Jul 2013 Last revised: 26 Oct 2018

See all articles by Swee Sum Lam

Swee Sum Lam

National University of Singapore - NUS Business School

Tao Li

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Date Written: October 22, 2018

Abstract

The developing Chinese economy has gone through significant market reforms in recent decades by taking a deliberate path of trail-and-error policymaking. We hand-collect a sample of 59 policy reversals related to market liberalization from 1999 to 2017. Using a general equilibrium term structure model, we explore the economic outcomes after these policy flip-flops. We find that a half of the reversals have led to significant tradeoff between economic growth and the volatility of the growth. Moreover, the policymakers have missed the target sometimes as about a quarter of the reversals are detrimental to both the growth and the stability. These bad reversals are accompanied by higher term spread and volatility of the spread, making them easily identifiable. Overall, our methodology can be used to evaluate the economic impact of policy reversals in an objective and timely manner.

Keywords: economic growth; interest rate; policymaking; policy reversals; interbank repo; term structure; volatility

JEL Classification: E1; G1; O2

Suggested Citation

Lam, Swee Sum and Li, Tao and Zhang, Weina, Unveil the Economic Impact of Policy Reversals: The China Experience (October 22, 2018). China Finance Review International, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2297136 or http://dx.doi.org/10.2139/ssrn.2297136

Swee Sum Lam

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6516 3037 (Phone)
+65 6779 2083 (Fax)

HOME PAGE: http://www.bschool.nus.edu

Tao Li

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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