Deflationary expansion: An overshooting perspective to the recent business cycle in China

Deflationary expansion has puzzled economists both in and outside China. We study this business cycles phenomenon within a model of discrete time dynamics. We find that deflationary expansion could be possible if driven by an overshooting in investment and if the state of the economy maintains high rate of growth. This expression is consistent with the recent time series variation of some key macroeconomic variables. The high steady state of growth could be explained by the current institutional environment of China.