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
Date Written: October 22, 2018
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: Suggested Citation