Dynamic Efficiency Redux: Evidence from China

Dynamic efficiency is an important concept in the analysis of consumption, asset pricing, and fiscal policies. Using an illustrative overlapping generations model, this study shows that when the interest rate is lower than the growth rate, active fiscal policy can increase both consumption and efficiency. It provides an integrated analysis using different interest rate metrics, comparing the risk-free rate r_f, returns on assets r_e, and returns on capital r_k with the growth rate g. The findings indicate that, in general, r_f < g, g < r_e, and g < r_k. This condition suggests that fiscal policy can play a positive role in stimulating consumption. As the economy decelerates, the gap between r_f and g continues to narrow. A state-space model is also used to estimate China's natural interest rate r* and potential growth rate g*, showing that r* < g* and the gap between them has narrowed gradually over the past two decades.