Thread by @ChinaFinance40

The Chinese #economy stayed on the hot side in 2002-2011. The average #GDP deflator was 4.6%; the real #interestrates was lower than the neutral one. But since 2012, the economy was on the cold side, with the average GDP deflator falling to 2.1% in 2012-2019...1/6

The real interest rate was lower than the neutral one in 2002-2011. During this period, although #monetary policies remained tight with an overall fiscal surplus, there was still room for further tightening both monetary and fiscal policies when we look back now...2/6

In 2012-2019, it was completely the opposite. GDP deflator was low and the real interest rate was higher than neutral. Monetary policy was relatively loose...3/6

But the decrease rate of prices still exceeded that of the nominal interest rate, and a lax monetary policy failed to stay stable or lower the real interest rate. Fiscal expenditure kept expanding, causing higher neutral interest rate and narrower real interest rate gap...4/6

#China and developed countries adopted different policies to eliminate the deviation of the real interest rate from the neutral one. The latter generally adopt a proactive monetary policy, which, even when used to the extreme, may still fail to reduce the real interest rate...5/6

China is more conservative in monetary policy adjustment, trying to maintain policy room all the time, whereas broad fiscal expenditure is relatively proactive. What combination of fiscal and monetary policies is more reasonable still worth discussing. 6/6
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