China’s Growth Targeting and Policy Implication for LDCs

Jiang, Yanqing; Dai, Yuwen

The current wave of globalization has encouraged growth in the world economy and affected all sides of international economic involvement over the last few decades. Developing and emerging market economies have introduced major policy reforms and experienced significant economic growth. As a developing country, China has set an annual growth target, which has driven the nation’s economic policies for decades. Motivated by the Chinese experience, we develop an analytical framework to examine the case of economic growth targeting. In our model economy, key features for developing countries include the degree of commitment by the central bank, semi-dependence between the monetary authority and the fiscal authority, and the risk of sovereign default. From our analytical results, we find that under a GDP growth targeting regime, when the central bank is more committed to its growth target, the actual growth rate becomes close to the target level, the inflation rate increases moderately for those countries with flatter supply curves, and the social welfare improves. Moreover, higher growth rate is associated with lower tax levied by the fiscal authority, and it is inversely related to the government’s default probability. Policy implication could be drawn from our model results for developing countries when they evaluate the policy option of growth targeting, in order to achieve positive and sustainable economic growth.