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Volatility and Economic Systems: Evidence from A Large Transitional Economy

Wang, Boqun and Yang, Dennis Tao (2021): Volatility and Economic Systems: Evidence from A Large Transitional Economy.

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This is the first paper to study the role played by economic transition in reducing output volatility. A dramatic decline in aggregate output volatility in China from central planning to market-oriented reforms in the past half century is documented in this paper. The output volatility measured by the standard deviation of real gross domestic product (GDP) growth over the specified rolling windows declined by 73% from 1953-1977 to 1978-2008. The sharpest reduction occurred in 1978 when China began to initiate a series of market reforms. Since the inception of these reforms, the volatility continued to decline, dropping more than 30% from 1978-1994 to 1995-2008. During the planning period, the co-movements in the provincial output, which reflected the systemic risks associated with the highly centralized economic and political systems in China, were found to be the primary source of the high output volatility.

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