Macro Economy

Macro Economy Proceedings, Issue No. 8, February 2013 (PDF: 547kb)

The Business Cycle in China since the Lehman Crisis: Interaction among Macroeconomic Policy, Economic Growth and Inflation

C. H. Kwan

Senior Fellow, Nomura Institute of Capital Markets Research

ABSTRACT:

For China, the major objectives of macroeconomic policy are to stabilize economic growth and inflation, which in turn are major determinants of such key “prices” as the policy interest rate, the renminbi exchange rate, and stock prices. In a framework that distinguishes different phases of the business cycle based on whether the current period’s economic growth rate and inflation rate are above or below their “normal” values, this paper analyzes the interaction of macroeconomic policy, economic growth and inflation over time, and its implications for these key prices.

The path of China’s economy since the Lehman crisis indicates that stimulus measures taken by the government during the recession phase and tightening measures implemented during the overheating phase have helped minimize the fluctuation over the business cycle.

Based on the Taylor rule, which describes how monetary authorities adjust policy in response to changing economic conditions, our analysis shows that Chinese authorities tend to rely more on adjusting the exchange rate than the interest rate to stabilize the economy.

Finally, comparison with conditions at the time of the post-Lehman recession suggests that the current slow pace of economic growth in China may reflect not only weakening demand, but also a lower potential growth rate associated with the arrival of the Lewisian turning point.