A System Dynamics Approach to the Function of the Economic Leverages in China’s Economy

Abstract

After being overlooked for many years, now the financial and monetary system plays an important role of adjustment and control functions in national economy, relating to which, the four economic leverages--price, tax rate, interest rate and wage are the main tools of carrying out these functions. Based on system dynamics approach, this paper quantitatively studies the long-term development tendency of their interaction and coordination. Based on simulating results under normal economy development, policy tests and analyses have been done to discuss the problems emerging from current economic reform. The reasonable ranges of the adjustment of price, tax rate, interest rate and wage increase rate are suggested and the amount of money supply are discussed. Then some policies of coordinately applying the leverages to improve the behaviors of system are put forward. This paper has made some progress in quantitatively analysing the long-term development of the financial and monetary system, in establishing a credible and practical model for policy analysis to solve the problems emerging from the economy of China.