Withstanding Great Recession like China

Abstract

The Great Recession was characterized by two related phenomena: (i) a jobless recovery and (ii) a permanent drop in aggregate output. Data show that the United States, Europe, and even countries with lesser ties to the international financial system have suffered large permanent losses in aggregate output and employment since the financial crisis, despite unprecedented monetary injections. However, the symptoms of the Great Recession were not observed in China, despite a 45% permanent drop in its exports one of the largest trade collapses in world history since the Great Depression. Our empirical analysis shows that China's success in escaping the Great Recession is attributable to its bold and powerful 4 trillion renminbi stimulus package launched in late 2008. We study the precise channels through which the stimulus programs work in China. We also construct a simple model to rationalize the dramatically different impacts of stimulus programs across countries.