ABSTRACT
China’s current economic cycle started to expand in 1991 and reached its peak in 1994; then it entered a contraction stage. In 1998, China’s macroeconomic operation showed a decline in economic growth, deflation caused by unemployment, and other recessionary phenomena. The transformation of the economic cycle from expansion to contraction is triggered by the negative social welfare effect of inflation, but not because the economic growth has reached its technical upper limit of aggregate supply. If emphasis is placed on the domestic balance goals for economic stability and an expansionary monetary policy is to be adopted to expand effective demand, then it is necessary to carry out hedging operations to increase the domestic money supply. Since the beginning of 1998, the monetary policy has showed a totally relaxed orientation. Given the policy effect and technical factors of the taxation system, the leverage of taxation would lack the operating space for corresponding adjustment.
