Quantitative Analysis On China's Business Fluctuations Based On Dynamic Stochastic General Equilibrium Models

Since 1978, when the reform and opening up started, China has been experiencing wild business cycle fluctuations as well as high growth speed. In some times, China's GDP growth reached 15 percent. But there were also some times GDP growth slowed to only 4 percent. Meanwhile, fluctuations in inflation saw even bigger volatility. Facing such big economic fluctuations, we may ask: What caused them? To answer this question is the main task of this research.In nowadays, it is widely believed by macro economists that business fluctuations are driven by various exogenous stochastic shocks including technology shock, monetary policy shock, preference shock, cost shock, etc. However, economists from different macroeconomic schools have different opinions on the relative importance of different shocks. Our research started from the decomposition of quantitative impacts of different shocks. After the summarization of stylized facts of China's business fluctuations, two dynamic stochastic general equilibrium (DSGE for short hence force) models were established. Parameter values in these models were estimated with Bayesian method. Realizations of different shocks were also obtained with Kalman smoothing algorithm. Substituting each estimated shock back into the model and running simulations yield the dynamics of endogenous variables under the influence of a single shock. Hence, the quantitative impact of each shock on the whole economy could be studied. Quantitatively important shocks could also be identified.The following main conclusions could be drawn from the quantitative analysis: First, technology advances and institutional changes were the main drivers of China's business fluctuations. The fluctuations of these two factors themselves moderated in the past several years, which leaded to the moderation of output fluctuations. Second, the fluctuations in inflation were mainly caused by monetary polices. Third, government consumption and net exports had only ignorable impacts on business fluctuations.Our work sheds some new lights on the research of China's business fluctuations for the following reasons: First, quantitative impacts of different shocks were decomposed with DSGE models for the first time. The main driving forces of China's business fluctuations were also identified. Second, monetary policy implementation based on the control of monetary aggregate and varying circulation velocity of money were both introduced into a DSGE model for the first time, which enhanced the external consistency of the constructed model. Third, the structural break occurred around 1992 was identified for the first time. The possible bias brought by it was carefully removed in the quantitative analysis. In addition to these three breakthroughs, contributions of our research can also be identified from a methodological perspective. State of art quantitative analyzing methods based on DSGE models were summarized and, more importantly, implemented with computer programs in our research, which will facilitate the quantitative research of other researchers.