430. The Persistence Characteristics of Output Growth in China: How Important is the Business Cycle?

James S Laurenceson, School of Economics Discussion Paper No. 430 June 2011, School of Economics, The University of Queensland. Australia.

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Abstract

Output growth volatility at the macroeconomic level reflects the impact of demand and supply-side shocks. These shocks differ in terms of the persistence of their impact on output growth with the former typically being responsible for cyclical fluctuations of the business cycle variety. This paper uses Spectral Density Analysis to decompose the persistence characteristics of output growth in China since 1953, including in its provinces and regions. An important finding is that the persistence characteristics of output growth changed dramatically in most provinces during the reform period to the extent that only a minority of output growth variance can be attributed to business cycle fluctuations. This finding points to a number of challenges for policy-makers, including questions over the expected effectiveness of using macroeconomic policies that are intended to smooth business cycle fluctuations when the nature of output growth volatility is considerably more complex.