Deflationary Expansion: an Overshooting Perspective to the Recent Business Cycle in China

Gang Gong, Justin Yifu Lin
JEL codes: 
China Center for Economic Research Working Paper

Deflationary expansion has puzzled economists both in and outside China. We study this business cycles phenomenon within a model of discrete time dynamics. We find that deflationary expansion could be possible if driven by an overshooting in investing and if the state of the economy maintains high rate of growth. This expression is consistent with the recent variables. The high steady state of growth could be explained by the current institutional environment of China.