The Great Moderation in China: A Disaggregated Analysis

This paper examines whether the major components of China's real gross domestic product (GDP) have exhibited smoother, less volatile growth since the late 1990s, and, if so, what has caused this "great moderation" in their growth. Employing unknown-structural-breakpoint tests and constructing a counterfactual analysis based on vector autoregression models, the authors show that the growth rates of all the major components of China's real GDP have followed a relatively steady course since the late 1990s, with the most marked decrease in growth volatility (i.e., volatility of growth rate of the components of real GDP) occurring in the consumption sector. Empirical results reveal that systematic policy improvements account for less than 30 percent of the drop in the volatility of growth in aggregate consumption, while policy improvements do not explain investment and rates of net export growth.