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Chinese economy’s secret recipe


Fan Gang gives an insider's peek into the Chinese monetary policy.

Fan Gang gives an insider's peek into the Chinese monetary policy.

Economic theory holds that all crises are caused by bubbles or overheating, so if you can manage to prevent bubbles, you can prevent crises. The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.

I am not quite sure whether all Chinese policymakers are good students of modern economics. But it seems that what they had been doing in practice happened to be better than what their counterparts in some other countries were doing—a lot on “deregulation”, but too little on cooling things down when the economy was booming and bubbles were forming.

The problem for the world economy is that everybody remembered Keynes’ lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone—with no symmetric policy intervention—during the preceding boom. But managing the boom is more important, because it addresses what causes crises in the first place. (via Chinese economy’s secret recipe – Views – livemint.com).

Fan Gang, till recently the only academic advisor on monetary policy committee of the People’s Bank of China, gives a rather interesting take – albeit an insider’s view.

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