China's Gradualistic Economic Approach and Financial Markets
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 for the 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.
We would like to thank participants at the AEA 2017 annual meetings and especially our discussant Darrell Duffie. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Markus K. Brunnermeier
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Markus K. Brunnermeier & Michael Sockin & Wei Xiong, 2017. "China's Gradualistic Economic Approach and Financial Markets," American Economic Review, vol 107(5), pages 608-613. citation courtesy of