Real interest rate offers an important clue for understanding China’s #macroeconomy now and beyond, according to CF40 report “Changes of Real Interest Rates and Combination of Fiscal and Monetary Policies”:
cf40.org.cn/Uploads/Pictur…
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In 2000-2011, as #savings and #investments continue to boom in #China, the real #interestrate fell. The turning point arrived in 2011. After that until 2019, the savings rate and investment rate kept falling, and the real interest rate picked up. How to explain the change? ...2/7
The decline in the real interest rate in the first period was caused by the falling relative price of capital goods, deteriorated income distribution, longer life expectancy and lower dependency ratio...3/7
More importantly, this period saw the peak of China’s industrialization –government income rose beyond expectation, household income surged with more passive savings, and the gap between savings and investments of businesses were hugely narrowed...4/7
In the second period, however, these factors driving down the real interest rate disappeared, while the alleviation in financial repression and higher fiscal expenditures also contributed to higher real interest rate...5/7
The real interest rate may not necessarily circle back and stabilize at the neutral rate that reflects full employment. Based on the extent of inflation in China, the real rate was lower than the neutral rate in the first period while higher than it in the second period... 6/7
To narrow the gap between them, proper combination between fiscal and monetary policies is necessary. 7/7
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