Working Paper: CEPR ID: DP5403
Authors: Olivier J. Blanchard; Francesco Giavazzi
Abstract: Our paper is an attempt to define the contours of the right macroeconomic strategy for China. In a nutshell, we believe that the package includes a decrease in saving, with a focus on private saving, an increase in the supply of services, in particular health services, and an appreciation of the RMB. This is why we refer to this strategy as a 'three-handed approach': action on the fiscal and budgetary front, accompanied by currency revaluation. We start by asking how the Chinese economy got to where it is - what the strategy has been since the beginning of the reforms, and what the main characteristics of the economy are today. We then ask what is the desirable path for the future, and which are the main policy tradeoffs implied by such a path. Finally, we put the various pieces together to describe what we believe is a consistent policy package.
Keywords: China; Economic Development; International Economics
JEL Codes: E2; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in private savings (E21) | Increase in consumption (E21) |
| Increase in consumption (E21) | Facilitate economic rebalancing (E69) |
| High savings rates (D14) | Low consumption (E21) |
| Low consumption (E21) | Negative impact on overall economic growth (F69) |
| Increasing the supply of health services (I11) | Improve welfare (D69) |
| Improve welfare (D69) | Reduce need for precautionary savings (E21) |
| Reduce need for precautionary savings (E21) | Allow for greater consumption (D10) |
| Appreciating the RMB (F31) | Decrease in trade surplus (F19) |
| Decrease in trade surplus (F19) | Essential for internal economic balance (E62) |
| Appreciating the RMB (F31) | Potential adverse effects on agricultural incomes (Q11) |
| Appreciating the RMB (F31) | Implications for income inequality (F61) |