China’s Business Cycles between 1954 – 2004: Productivity and Fiscal Policy Changes

We study the real business cycles in China between 1954-2006, and examine the changes after China’s market-oriented reforms starting in 1978. We overcome some data problems and find that the economic volatility is generally moderated after 1978. However, the relative volatility of each variable to output diverges. We undertake a neo-classical approach to investigate factors that can drive the features of long-term fluctuations and the differences between the pre-1978 and the post-1978 periods. We find that TFP process can explain the main features of fluctuations and the general moderation but not the relative volatility changes. We show that policy changes in government expenditure can account for the relative volatility divergency. Counterfactual experiments are also provided to discover the role of each factor in explaining the long-term fluctuation features in China.