China's Gradualistic Economic Approach and Financial Markets
Markus K. Brunnermeier, Michael Sockin, Wei Xiong
American Economic Review · 2017 · Volume 107 · Issue 5
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 to 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.
Keywords
Financial Markets and the Macroeconomy, Monetary Policy, Fiscal Policy, Financial Crises, Financial Institutions and Services: Government Policy and Regulation, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance, Socialist Institutions and Their Transitions: Financial Economics
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