China: Macroeconomic Cycles in the 1980's

IMF Working Papers, September 1, 1991

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The paper explores links between reforms, macroeconomic management and the occurrence of macroeconomic instability in China during the last decade.
Using previous analytical work and the “Granger causality” test, the paper concludes:
- The cycles did not originate with the reforms; rather their characteristics were modified by structural changes in the economy.
- The incompleteness of reforms (which renders macroeconomic management difficult) had the effect of exacerbating the cycles by increasing their amplitude and frequency.
- Results from the Granger tests suggest that broad money would be a good intermediate target for monetary policy.

Draws upon previous analytical work.
Employs the “Granger causality” test to investigate directional relationships among macroeconomic variables and policy instruments.

Because reforms were incomplete and made macroeconomic management difficult, policy design should account for structural distortions that amplify cycles.
Broad money is identified as a potentially effective intermediate target for monetary policy based on Granger causality test results.

Subject areas: Currencies, Imports, Industrial production, Inflation, International trade, Monetary base, Monetary expansion, Money, Prices, Production.
Keywords: broad money, credit plan, credit policy, Currencies, establishment of the People's Bank of China, further price liberalization, Imports, Industrial production, Inflation, Monetary base, monetary policy, monetary policy formulation, PBC credit, People's Bank of China, price, price determination, price distortion, price reform, price system, retail price index, two-tier price system, WP