China's Gradual Economics Approach and Financial Markets


Brunnermeier, Markus K., Michael Sockin, and Wei Xiong. “China's Gradual Economics Approach and Financial Markets”. American Economic Review Papers and Proceedings 107.5 (2017). Print.


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.

Last updated on 03/05/2017