The Effect Of Short-run Volatility On Long-run Growth: Empirical Study For China During Transition

A strong tradition among macroeconomist has been to study the short-run volatility and long-run growth as two separate phenomena. However, increasingly important literature suggests that there is relationship between volatility and growth. The relationship has significant policy implications, which, moreover, depend on the sign of the relationship. Because the relationship may depend on country characteristics, such as institution environment, it is important to study it aiming at concrete country. Presently, there is a major ignorance in the literature of the link between volatility and growth in China, this dissertation try to contribute to this area.The objective of this paper is to provide empirical evidence on the effect of volatility on growth in transitional period of China. In order to help understand the relationship and put into context the empirical results, this paper at first reviews the theoretical and empirical literature examining the effect of volatility on growth. Also, the various meanings and measures of volatility have been discussed and the nonlinear effect of volatility on growth due to the different institution environment has been analyzed. Then, the effects of China's market-oriented reform and openness to the outside on growth and volatility have been analyzed, and a variety of stylized facts about the changes in the dynamics of growth and volatility over time and across regions have been provided. At last, using panel data for Chinese provinces and appropriate econometric methods, this paper conduct a more formal analysis of the effect of volatility on growth, including an examining how evolutions of marketization and openness may have affected this relationship. Also, Several possible interpretations for empirical results have been provided. Based on these interpretations, this paper explores some channels that guide the relationship between Chinese volatility and growth.The main empirical result of this paper is that marketization significantly weaken the negative effect of volatility on growth, the association between volatility and growth depends on the extents of marketization. In provinces of more marketization, the relationship appears to be positive, whereas in less marketization ones, it is negative. The robustness of these results has been tested. Further empirical study indicates that non-state-owned investment may be the important channels through which China's volatility affects growth. Moreover, the study suggests that there is no significant relation between volatility and productivity.