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Economic Development Faces a New Stage in Which Reform Will Promote Readjustment

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Abstract

1. After a year of "improvement and straightening out," the economic situation in the fall of 1989 can roughly be summarized as follows: The superficial cause of the 1988 price hikeâexpansion of real purchasing power as represented by >i>M>sub>o>/sub>>/i> (cash)âhas been brought under initial control. From this point of view, we can say that control of aggregate demand is achieved, hence prices are showing a tendency to drop and the overheated economy is cooling down rapidly. On the other hand, problems in the economic structure and system have basically remained untouched. These problems at a deeper level are urgently in need of a solution, otherwise further economic development would be difficult. The above two facts show that the work of readjustment of the national economyâimprovement, straightening out, and deepening the reformâhas entered a new stage.

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This article presents an empirical study of the effect of fiscal divergence on the business cycle volatility at the provincial level in China. We use the model of Darvas, Rose, and Szapáry (2007 Darvas, Z., Rose, A., & Szapáry, G. (2007). Fiscal divergence and business cycle synchronization: Irresponsibility is idiosyncratic. In J. Frankel and C. Pissarides (Eds.), NBER international seminar on macroeconomics (pp. 261–298). Cambridge and London: MIT Press. [Google Scholar]) and Furceri (2009 Furceri, D. (2009). Fiscal convergence, business cycle volatility, and growth. Review of International Economics, 17(3), 615–630. doi:10.1111/j.1467-9396.2009.00837.x[Crossref], [Web of Science ®] [Google Scholar]) to examine this relationship. We find that there is a positive and statistically significant relationship between the fiscal divergence and business cycle volatility across China. Our empirical results are robust with respect to the different measures of fiscal divergence and the different detrending methods. Results show that provinces with similar government budget positions tend to have smoother business cycles in China.
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