CONTENTS

Test on the Externality of Infrastructure in China£º1988¡ª2007

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Liu Shenglong and Hu Angang   (4)

Intensity and Efficiency Loss of Industry Administrative Monopoly in China

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Yu Liangchun and Zhang Wei  (16)

Empirical Analysis and Forecast of the Level and Speed of Urbanization in China

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Jian Xinhua and Huang Kun   (28)

Taylor Rule with Regime Switching and Its Application to China's Monetary Policy

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Zheng Tingguo and Liu Jinquan   (40)

Fiscal Decentralization, Intergovernmental Transfer and Market Integration

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Fan Ziying and Zhang Jun    (53)

Political Connections, Rent Seeking, and the Fiscal Subsidy Efficiency of Local Governments

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Yu Minggui, Hui Yafu and Pan Hongbo   (65)

Nonlinear Smooth Transition of Chinese Business Cycle

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Wang Chengyong and Ai Chunrong   (78)

Assets Price, Exchange Rate Volatility and Optimal Interest Rule

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Li Cheng, Wang Bin and Ma Wentao   (91)

The Study of Exchange Rate Determination Based on Power Paradigm

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Zhang Yishan and Kong Lingzhu    (104)

Vertical Integration, Outsourcing and Economic Progress: A New Classical Infraª²marginal

General Equilibrium Analysis¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Pang Chun        (114)

Energy-Save and Emission-Abate Activity with its Impact on Industrial Win-Win Development

in China: 2009¡ª2049¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Chen Shiyi    (129)

A Study on Market Reactions to the Semi-mandatory Dividend Policy

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­ Li Changqing, Wei Zhihua and Wu Shinong     (144)

A Summary on the Forum of Financial Stability and Industrial Development

¡­¡­¡­¡­¡­¡­ Ye Xiangsong, Cui Jianhua, Yan Zongxin, Xu Zhongai and Zhao Zhuo  (156)

Test on the Externality of Infrastructure in China£º1988¡ª2007

Liu Shenglong and Hu Angang

(Center for China Study, Tsinghua Universtiy)

Abstract:As a kind of investment, infrastructure can not only boost economic growth, but also boost economic growth indirectly through spillover effects. This conclusion has been tested in many foreign literatures, while we can hardly find any domestic literatures about the impacts on China¡¯s economic growth or the spillover effects of infrastructure. This paper mainly collects China¡¯s provincial panel data from 1988 to 2007 to test the three netwok infrastructure for the spillover effects of China's elonomic growth. The results indicate that transport infrastructure and information infrastructure have a significant spillover effect on China¡¯s economic growth, this conclusion conforms to our theoretical expectation; energy infrastructure does not have a significant spillover effect on China¡¯s economic growth, this can mainly attribute to inefficient energy use. The modernization of infrastructure will continue to speed up China's industrialization, urbanization£¬information modernization and internationalization to form the next period of our sustained, stable high-growth power.

Key Words:Infrastructure; Externality; Total Factor Productivity

JEL Classification:P200£¬O470£¬O410

Intensity and Efficiency Loss of Industry

Administrative Monopoly in China

Yu Liangchun and Zhang Wei

(School of Economics, Shandong University;

Anti-monopoly and Regulation Research Center, Shandong Province)

Abstract:In this paper, we constructed the ISCP framework to study industry administrative monopoly in the transitional economies. we analysed the maintenance and transmission mechanism of industry administrative monopoly from the point of ISCP framework. In addition, we designed a indicator system to measure the intensity and effect of industry administrative monopoly using the data from statistical yearbook and survey. we also calculated the intensity and effect of industry administrative monopoly in power, telecom, oil and railroad industry. Through the analysis of this paper we can find that the industry administrative made a big loss in many aspects. That means the reform of administrative monopoly sectors could greatly improve the competition in many industries as well as the growth of the national economy.

Key Words:Industry Administrative Monopoly; ISCP; Intensity of industry Administrative Monopoly; Efficiency Loss

JEL Classification:D02, L13, P23

Empirical Analysis and Forecast of the Level and Speed

of Urbanization in China

Jian Xinhua

(Research Center for Economic Development, Wuhan University)

Huang Kun

(Institute of Contemporary Marxism Study, Xinyang Normal College)

Abstract:In this paper, based on the empirical analysis and international comparative study of the actual situation of China's urbanization, we find that, generally speaking, the level of urbanization in China is the lag which not only reflected in lagging behind the level of development of the domestic economy and lagging behind the process of industrialization and non-agriculture, but also reflected in lagging behind the level of urbanization in the same level of development or the same stage of development in foreign countries. In current, the speed of China's urbanization is basically suitable, neither too fast nor too slow. Through qualitative analysis method and by using of time series prediction method, it is estimated that the trend of rapid development of urbanization in China will be maintained and the rate of urbanization will continue to increase at about one percentage point annually, and the urbanization rate will reach about 60% in 2020. Therefore, it is necessary to continue to raise the level of urbanization in China.

Key Words:Urbanization in China; Level of Urbanization; Speed of Urbanization; Prospects of Urbanization

JEL Classification:O100, O180

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Taylor Rule with Regime Switching and Its Application to

China¡¯s Monetary Policy

Zheng Tingguo1 and Liu Jinquan²

(1. The Wang Yanan Institute for Studies in Economics, Xiamen University;

2. Quantitative Research Center of Economics, Jilin University)

Abstract:The Taylor rule has some limitations for its linearity setting, so it may be presented as a nonlinear system due to the presence of different macro-economic environment and different policy time. This paper developed a regime switching Taylor rule with time-varying inflation target, and used it to investigate the monetary policy reaction of China from 1992 to 2009. Empirical results show that the policy rule has significant regime switching features, that is different regimes reflect different policy reactions of interest rate to inflation and real output. In the second regime, the policy rule behaves as a Taylor rule with the stable reaction of the interest rate to inflation and real output, while in the first regime this is not a stable framework because the interest rate is not sensitive to inflation and real output. Combined with the performance and characteristics of China¡¯s monetary policy, the first and second regimes can be denoted as the ¡°passive¡± and ¡°active¡± regimes, respectively.

Key Words:Taylor Rule; Regime Switching; Monetary Policy; Inflation Target; Output Gap

JEL Classification:E52, E58

Fiscal Decentralization, Intergovernmental Transfer

and Market Integration

Fan Ziying and Zhang Jun

£¨China Center for Economic Studies, Fudan University£©

Abstract:We analyse the market segmentation, which is a rational choice of the local governments, stems from the fiscal decentralization system. We believe the fiscal transfer from the central government to the less developed provinces can reduce their incentives of market segmentation, and meanwhile share the benefit of economy growth of the coastal provinces. When the amount of transfer can set off the loss of corporation, the inland provinces will abandon the market segmentation strategies, and then improve the whole scale economy. Using a panel data from 1995 to 2005, we find the fiscal transfer will bring the domestic market integration, among the three composition of the transfer, the earmark transfer is the most important, and the rest are not very significant.

Key Words:Intergovernmental Transfer; Market Integration; Division of Labor

JEL Classification:E62, F15, H77

Political Connections, Rent Seeking,

and the Fiscal Subsidy Efficiency of Local Governments

Yu Minggui, Hui Yafu and Pan Hongbo

(Economics and Management School, Wuhan University)

Abstract:This paper tests whether private firms with political connections of local governments get more fiscal subsidies from local government than those without political connection. Using China¡¯s listed private firms as sample, we find that private firms with political connection do get more fiscal subsidies than the counterparts, and that poorer the institutional environments are, stronger the subsidy acquiring effect of political connections is. Further results find that subsidies obtained by firms with political connections are negatively related with firm performance and social performance, while subsidies obtained by firms without political connections are positively related with firm performance and social performance. Above evidence supports the rent-seeking hypothesis of political connections, namely, via political connections, private firms capture local government officers who have the rights to distribute fiscal subsidies, and therefore get as much subsidy revenues as possible. In weaker province where the private firms are located, more prevailing the rent-seeking behaviors are. Our results suggest that the fiscal subsidy policies of local governments, based on private firms¡¯ political connections, result in the distortion of scarce resources allocation and the decrease in the whole social welfare.

Key Words:Political Connection; Fiscal Subsidy; Rent Seeking; State Capture

JEL Classification:D72, G21, G32, P48

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Nonlinear Smooth Transition of Chinese Business Cycle

Wang Chengyong and Ai Chunrong

(College of Mathematics & Computer Science, Xiangfan University;

College of Statistics & Management, Shanghai University of Finance & Economics£©

Abstract:Applying STAR type model theory, this paper establishes two regimes, three regimes and four regimes LSTAR model respectively, to investigate the partition method, the asymmetry and persistence characteristics, and the internal involve mechanism of Chinese business cycle by employing GDP growth rate data from 1979Q1 to 2009Q3 in China. The results show that: partitioning the business cycle phases to be contraction, recovery and expansion three regimes, it is able to depict the nonlinear dynamic structure of Chinese economic growth; but the contraction, recovery, expansion and recession four regimes partition method improves the explanation ability on economic growth structure of China markedly. The different smooth transition speed among different business cycle phases and the stationarity of different regimes elucidate the strong asymmetry and the internal involve mechanism of Chinese business cycle. The partition results of sample data among regimes indicate that the expansion phase has strong persistence, the contraction phase has moderate persistence, the recovery and recession phases are transitional phases. Lastly, the policy meanings of our results are also discussed briefly.

Key Words:STAR Model; MRSTAR Model; Business Cycle; Asymmetry; Persistence

JEL Classification:C22, E32

Assets Price, Exchange Rate Volatility and Optimal Interest Rule

Li Cheng, Wang Bin and Ma Wentao

(School of Economics and Finance, Xi¡¯an Jiaotong University)

Abstract:The paper first builds a dynamic macro economy model under the condition of none efficient asset markets in an open economy, the optimal monetary policy is obtained from the model. The result shows that the centre bank should adjust nominal interest rate not only in response to the change of output and inflation, but the change of asset price and exchange rate as well. We made an empirical study of Chinese monetary policy from 1998 to 2009, the result shows that the adjustment of interest rate followed the optimal monetary policy, the rule can be a reference framework of Chinese monetary policy and can manifest the condition of monetary policy; the result also shows that interest adjustment mainly refers to GDP growth and inflation, its reaction to asset prices change and exchange rate volatility is minus or non significant; the empirical test of the dynamic character of Chinese monetary policy design structure shows that Chinese monetary policy is stable and consistency. Totally, Chinese monetary policy should further strengthen and improve the equilibrium of policy adjustment and keep the long run stability of macro economy in the background of economic open policy and reform in financial system.

Key Words:Monetary Policy£»Assets Price£»Exchange Rate£»Interest Rate Rule

JEL Classification:E520£¬G120

The Study of Exchange Rate Determination Based on Power Paradigm

Zhang Yishan^a,b and Kong Lingzhu^b,c

(a: Center for Quantitative Economics, Jilin University; b: Business School, Jilin University;

c: Department of Basic Sciences, Jilin Architectural and Civil Engineering Institute)

Abstract:The classical exchange rate theory only explains the change of actual exchange rate partially, the reason is that these theories might ignore the national factors and believe that exchange rate is determined by market factors only, or can¡¯t reflect the real national target. In fact, a special arrangement about exchange rate will affect the profits of all countries, the change of exchange rate will bring about the redistribution effect of international economic benefits. According to the description of national economic power and setting of national utility function, this paper constructs a game model about exchange rate determination and analyses utility change of different parties under various conditions. The model deduction shows that: the game based on economic power determines the change of exchange rate, the influence state of actual exchange rate relative to different parties is isomorphic with the contrast state of different parties¡¯s economic power, that is the larger national economic power, they will strive for more favorable result in change of actual exchange rate and obtain more economic benefits ultimately, and hereby can explain the reason about longª²term change trend of exchange rate better.

Key Words:Exchange Rate Determination; Economic Power; Ideal Exchange Rate Region; Utility Function; Game Strategy

JEL Classification:C78, F31

Vertical Integration, Outsourcing and Economic Progress:

A New Classical Infra-marginal General Equilibrium Analysis

Pang Chun

(Institute for the Division of Labor & Infra-marginal Economics at Nanjing Audit University)

Abstract:A new classical general equilibrium model with infra-marginal approach, based on a trade-off between the economies of the division of labor and trading costs, is developed to identify such production patterns as vertical integration and outsourcing and especially to reveal implications which the transformation from vertical integration to outsourcing as for economic progress. It is demonstrated that specialization, labor of intermediate inputs, productivities, the extent of the market and the real income per capita, with sufficient improvement of trading efficiencies, will concurrently increase with the emergence of outsourcing in the network of the division of labor.

Key Words:Vertical Integration£»Outsourcing£»Division of Labor£»Economic Progress

JEL Classification:D23, L23, O12

Energy-Save and Emission-Abate Activity with its Impact

on Industrial Win-Win Development in China: 2009¡ª2049

Chen Shiyi

(China Center for Economic Studies, School of Economics, Fudan University)

Abstract:Porter Hypothesis states that environmental governance may lead to win-win opportunities that it improves the productivity and reduces the undesirable output simultaneously. Based on directional distance function, this paper proposes a dynamic activity analysis model to forecast the possibilities of win-win development in Chinese Industry between 2009 and 2049. The evidence reveals that energy-save and emission-abate activity will result in both the improvement in net growth of potential output and the steadily increasing growth of total factor productivity. This favors Porter Hypothesis.

Key Words:Industry; Energy-Save and Emission-Abate; Environmental Governance; Porter Hypothesis; Win-Win Development

JEL Classification:D24, O47, Q25, Q32

A Study on Market Reactions to the Semi-mandatory Dividend Policy

Li Changqing, Wei Zhihua and Wu Shinong

(School of Management, Xiamen University)

Abstract£ºThis paper defines the policies as the Semi-mandatory Dividend Policy, in which the China Securities Regulatory Commission (CSRC) takes the certain level of dividend paid by listed companies as a prerequisite for their refinancing qualifications. We set the ¡°Decisions on Amending Some Provisions on Cash Dividends by Listed Companies¡± (hereinafter referred to as ¡°the Decisions¡±) released by CSRC on October 9, 2008 as the background, and research the market reactions to the Semi-mandatory Dividends Policy. The empirical results show that the capital market has an inverted U-shaped trend during the announcement of the Decisions, which means the investors experienced an ¡°expected-disappointed¡± reaction process. Furthermore, the market reactions are relatively poor for the companies that planed to refinance, the companies with high-growth and low free cash flow and the ones with low free cash flow in highly competitive industries, which shows the Semi-mandatory Dividend Policy has adverse impacts on the companies that having refinancing needs or potential refinancing needs. We argue that the Semi-mandatory Dividend Policy has to face the limitation of ¡°regulatory paradox¡±, and we further put forward the corresponding policy recommendations. This paper not only enriches the dividend study literature, but also helps to improve the Chinese laws and regulations on dividend policy.

Key Words£º Semi-mandatory Dividends Policy; Market Reaction; Dividend Policy; Investor Protection

JEL Classification£ºK22, G14, G35