DP1370 | A Macro-Theoretic Model of the Chinese Economy

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31/05/1996

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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.