A simple model of China’s model of China

Compared to the U.S. economy, the Chinese economy has fewer automatic stabilizers, such as welfare programs and unemployment insurance.  That implies their fiscal policy should, if possible, be especially countercyclical, compared to what is called for in most richer countries.

Chinese leaders view volatility as serially correlated and increasing from the source outwards.  Given Chinese history, they expect that shocks grow and spread rather than dampening down.  So when a shock comes, the demand to hold and indeed hoard very safe assets increases rather than decreases.  Chinese fiscal policy ends up being pro-cyclical rather than countercyclical.  And it is hard to succeed with fiscal policy in the first place.

Fortunately, I’m just making that model up.  Why should we expect lots of mistakes to be made? 


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