China's Gradualistic Economic Approach and Financial Markets

Markus Brunnermeier, Michael Sockin and Wei Xiong

American Economic Review, 2017, vol. 107, issue 5, 608-13

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.

JEL-codes: E44 E52 E62 G01 G28 O16 P34 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.p20171035
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Citations: View citations in EconPapers (8)

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