Why China’s deflation back in the late 1990s was not damaging

Professor Cheung criticized macroeconomics heavily.  One example is the failure to identify the relationship between deflation and economic downturn (including the rise of unemployment).  According to Cheung, China showed that a country free of labor restrictions can survive deflation without losing jobs.

 我认为那只是其中一个原因,不是主要的。美国当时已有反托拉斯法,有福利经济,有最低工资,而工会早就林立了。有了这些,阻碍了雇用合约的自由选择。局限有别,通缩对经济的杀伤力激增,在这情况下,增加货币量,搞起一点通胀,对失业是有帮助的。但如果美国当年不搞三搞四,因币量不足而引起的通缩是不会导致大萧条的。这方面,中国九十年代后期是重要的例证。当时官方的通缩率百分之三,考虑到产品质量同期急升,这通缩率会在百分之十以上,而楼价则下降了七成!失业率怎样呢?基本上不变,更重要的是经济继续急升。这是因为北京当时没有推出福利经济,少管最低工资,雇用合约的选择一律自由。http://blog.sina.com.cn/s/blog_47841af701000a8d.html

A recent article written by David Beckworth offered another explanation.  To him, aggregate supply-driven deflation (i.e. price level is driven down out of increase of productivity) should not be taken as the same as the one driven by declining aggregate demand.  The former one, which I assumed as the one China experienced back in the late 90s, is a ‘healthy’ one.

http://www.cato.org/pubs/journal/cj28n3/cj28n3-1.pdf

Both explanations may be true.  I would add one more point: Chinese consumption model was less dependent on credit, thus allowed them to ‘immune’ to increasing debt burden.  Related to this perspective, Fisher’s ‘The Debt-Deflation Theory of Great Depression’ is a insightful one to read.

http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

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