Working Paper: CEPR ID: DP1370
Authors: John Bennett; Huw David Dixon
Abstract: A stylized model of the Chinese economy is developed with three production sectors: agriculture, non-traded industrial goods, and industrial exports. The state purchases food from farmers by dual-track pricing; urban food sales are subsidized through ration coupons. Marginal prices clear markets except that currency controls constrain the availability of intermediates, the only imports. Devaluation is found to stimulate real variables, but deflates money variables; the reverse occurs with monetary expansion or raising the plan-track food procurement price. Lowering urban food subsidies or raising enterprise taxation reduces the budget deficit, reduces open and disguised unemployment, and deflates nominal prices.
Keywords: China; Transition; Open economy
JEL Codes: 011; P21; P52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency devaluation (F31) | exports (F10) |
| exports (F10) | availability of imported intermediates (F10) |
| restricting coupon exchange price (L42) | higher market prices (D49) |
| higher market prices (D49) | reduced output (E23) |
| higher market prices (D49) | increased nominal demand from coupon holders (E41) |
| increased nominal demand from coupon holders (E41) | higher nominal wages (J39) |
| higher nominal wages (J39) | reduced labor employment in export sector (F66) |
| higher prices paid to farmers (Q11) | increased budget deficits (H69) |
| greater quantities purchased by government (H57) | increased budget deficits (H69) |
| government purchasing policies (H57) | negative impact on macroeconomic performance (E66) |