Welfare Effect Of Economic Fluctuations During Chinese Transitional Period

The research on welfare effect of economic fluctuations is an important topic in modern macroeconomics. Great efforts for further research have been made since Lucas developed the basic method in this field. Most of them focus on advanced economies and support the view that welfare cost of present economic fluctuations is not very important. However, this article analyzes welfare effect of economic fluctuations during Chinese transitional period and puts forward the discussion from the angle of behavioral economics'review. A series of quantified conclusions shows that: an important welfare effect still exists and, most research based on lucas-framework underestimated the welfare cost of economic fluctuations.Chapter 1 points out value of the topic, identify some key concepts involved, and review present literature in this field. In chapter 2 I summarize main technical methods of getting data of economic fluctuations, preliminary analyze the basic feature of output fluctuation during Chinese transitional period, and set forth mechanism on how economic fluctuations exert influences on social welfare. From chapter 3 a series of normative analyze are carried out, the starting point of which is a standard framework by Lucas R. E. I gradually loose the rationality hypothesis using behavioral economics theory. Three types of economic fluctuations are considered: consumption fluctuation, income fluctuation, and price fluctuation. In chapter 3 I analyze the feature of Chinese consumption fluctuation and find that the volatility of Chinese consumption is much larger than not only that of American consumption, but also that of Chinese output, which violate the expectation of both Keynesian consumption theory and PIH-LC theory. Furthermore, such excess volatility of consumption is widely found in most east-Asian economies. A hypothesis on behavioral transition is proposed to explain the anomality, which is supported by preliminary examination.The volatility of Chinese consumption is greater than what standard consumption theory expects, which leads to a greater welfare cost of economic fluctuations even in traditional framework. It is also showed that the individual data is more suitable, for it presents more details of consumption fluctuation during Chinese transitional period.Chapter 4 extends original framework using prospect theory and a psychological rule named loss aversion. According to prospect theory, the effect of a negative income shock is higher than that of a positive one and as a result, a symmetric income fluctuation causes a welfare costs. After proposing an extended model, quantities conclusion shows that, welfare effect of income fluctuation, instead of that of consumption fluctuation as suggested in original model, plays a major role. With moderate variable setting, theλvalue considering income fluctuation is among 1.4%-13.4%, which is increased by 1-2 order than before.Chapter 5 makes a further step: new factors such as nominal income and price variability are taken into consideration. The preparation of this chapter is the behavioral assumption on brain's imperfect process ability to deal with public information, and the assumption on people is inattentive about macroeconomic information in behavioral sticky price theory. After refining and examing some features of price volatility during Chinese transitional period, chapter 5 proposes a model in which both nominal income and price level influence individual satisfaction. Agent use"psychological price level"instead of real price level to discount his income. Using a numerical calculation method the total welfare effect of price and income fluctuations during Chinese transitional period can be expressed as follows: to balance the welfare cost the total inhabitant income in 2005 should be increased by 4.35 thousand billion Yuan on time. Or equally, per capita income in urban area should be increased by 5000 Yuan, and that in rural area should be increased by 2069 Yuan or so. These figures amount to 52% percent of total inhabitant income in year 2005.Chapter 6 expands the concept of welfare. Subject wellbeing, a generalized wellbeing concept is involved. Several related issues such as the increase of uncertainty during transitional period, unemployment, and the subject welfare of the lowest income group are discussed. Finally, the relative importance between growth and economic fluctuation is examined again in view of subject welfare. It is proposed that original conclusion made in Lucas framework probably exaggerate the importance of economic growth, while underestimate the negative effect of economic fluctuations. Chapter 7 is conclusion and discussion.