Agriculture Reference
In-Depth Information
consumer price level mitigates the GDP price deflation and therefore
outperforms one that targets the nominal exchange rate. Moreover, if
monetary polcy must target the exchange rate and captal controls are
tight, the short-run contraction can be mitigated if lost tariff revenue is
made up through an increased direct tax rate, rather than left to expand
the fiscal deficit and thereby crowd out private investment.
When captal controls are neffectve or the government allows
substantial foreign investment, inflows on the capital account are greater
and so the real deprecaton caused by the reforms s reduced. Although
net gains are experienced irrespective of the monetary target, the floating
rate alternatve wth CPI targetng s agan superor. Wthout effectve
capital controls, however, a fiscal expansion does not crowd out domestic
investment. Failing to replace the lost tariff revenue through increased
drect taxaton s therefore no longer deleterous to short-run growth.
Indeed, the associated fiscal expansion augments the growth achieved in
ths case.
Because the trade reforms to whch Chna s commtted remove a
comparatvely large proporton of the exstng protecton afforded the food-
processing sector, that and some related agricultural activities contract
with the reforms, irrespective of the macroeconomic policy environment
chosen. The magnitude of the short-run structural change required is,
however, reduced if capital controls are relaxed and investment therefore
has a larger share of GDP. The fiscal policy response to the loss of import
tariff revenue has comparatively little influence over China's economic
performance in the short run. In fact, regardless of whether it is the
government spending or the government deficit that is held constant, the
optmal macro polcy envronment for Chna's economy durng these reforms
is a floating exchange rate regime with no capital controls.
Notes
1 For one line of evolution, see the papers by Ianchovichina and others (Ianchovichina et
al. 2000; Ianchovichina and Martin 2001 and 2002 and Walmsley et al. 2001).
2 We do not, however, differentiate rural from urban labour and hence we cannot represent
explctly the hukou system of labour market regulaton (Scular and Zhao 2002).
3 A detailed description of the original model is provided by Hertel (1997).
