seminar report 2.pdf

China Macroeconomic Policy from a Mercantilist Perspective Sun Chaoran ABSTRACT This essay analyze China Macroeconomic Policy from Mercantilist Perspective by borrowing heavily from framework laid in pioneering work of Zou(1997) and Wang and Zou(2011). The first part demonstrates its difficult, if not impossible to determining an optimal Macroeconomic Policy due to interpersonal comparison of ordinal utility issue. The second part gives a verbal description on what these models predict on mercantilist sentiment shock, monetary shock, foreign exchange rate shock, government purchase shock and foreign asset holding shock and point out potential limitations of these predictions. We conclude with a brief conclusion and a discussion of possible extension for future work. INTRODUCTION In the Lecture China Macroeconomic Policy Outlook: Implications on Exchange Rate And Interest Rates, Chris Leung showed what China Macroeconomic Policy should be like especially with respect to fine tuning of Exchange Rate And Interest Rates based on patterns manifest in historical time series data. Useful as such methodology may be, it divorced from agents rational choice behaviour, which implies that it is subject to the renowned Lucas Critique. In spite of methodological concern, another problem emerges that its one thing that its desirable to implement the policy deduced in the lecture, it is quite another to see them to be implemented in real life, for the reason that policy makers are notorious for lapsing into pursuing their own objective which is probably significantly deviated from maximization of general welfare as implicitly assumed and desired in the lecture. As a complement to leungs analysis, we utilize Zou(1997), Wang and Zou(2011) which model mercantilism as a result of maximization of representative agents utility to characterize the optimal China Macroeconomic Policy. At first sight, it, at least, doesnt make any sense to invoke any connection between mercantilism and norma