Stagflationary Effect of Government Bond Financing in the Transforming Chinese Economy: A General Equilibrium Analysis

Posted: 22 Sep 2000

See all articles by Michael Ka-yiu Fung

Michael Ka-yiu Fung

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Wai-Ming Ho

York University - Department of Economics

Li Jing Zhu

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Abstract

This paper studies how the method of government debt financing affects the macroeconomic performance of the transforming Chinese economy. The investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the Chinese economy. Using this framework, we evaluate the effects on the growth rate of output and inflation if the Chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing. It is shown that although this policy change can reduce the growth rate of the money supply, it can generate a stagflationary effect: reducing the rate of output growth while raising the rate of inflation, if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low.

Keywords: Economic Transformation, Government Debt Finance, Endogenous Growth Model, Stagflationary Effect, The Chinese Economy

JEL Classification: E6, O4, P2

Suggested Citation

Fung, Michael Ka-yiu and Ho, Wai-Ming and Zhu, Li Jing, Stagflationary Effect of Government Bond Financing in the Transforming Chinese Economy: A General Equilibrium Analysis. Available at SSRN: https://ssrn.com/abstract=238630

Michael Ka-yiu Fung (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong
852-2609-7819 (Phone)
852-2603-5104 (Fax)

Wai-Ming Ho

York University - Department of Economics ( email )

4700 Keele St.
Faculty of Arts
Toronto, Ontario M3J 1P3
Canada
(416) 736-2100 ext.22319 (Phone)
(416) 736-5987 (Fax)

Li Jing Zhu

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Clear Water Bay
Kowloon, Hong Kong
China

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