China's Gradualistic Economic Approach and Financial Markets

14 Pages Posted: 27 Feb 2017

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Michael Sockin

University of Texas at Austin - Red McCombs School of Business

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2017

Abstract

China’s gradualistic approach allowed the government to learn how the economy reacts to small policy changes, and to adjust its reforms before implementing them in full. With fully developed financial markets, however, private actors’ may front-run future policy changes making it impossible for the implement policies gradually. With financial markets the government faces a time-inconsistency problem. The government would like to commit to a gradualistic approach, but after it observes the economy’s quick reaction, it has no incentive to implement its policies in small steps.

Suggested Citation

Brunnermeier, Markus Konrad and Sockin, Michael and Xiong, Wei, China's Gradualistic Economic Approach and Financial Markets (February 2017). NBER Working Paper No. w23194, Available at SSRN: https://ssrn.com/abstract=2924284

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Michael Sockin

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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