How To Explain Business Cycles In China

This dissertation mainly contains two sduties of business cycle:one is applying the Business Cycle Accounting method to study business cycles in China, and the other is an analysis of inflation persistence in China from the perspective of specific shocks and common shocks.First, we apply the Business Cycle Accounting method to Chinese economy and find that among the four distorting efficiency, labor, investment and government consumption wedges, only the efficiency wedges are important to explain Chinese business cycles. This finding provides a new way to explain the economic fluctuations in China, i.e., making economic shocks and frictions to generate TFP fluctuations, which leads to the fluctuations of other variables. This kind of models is equivalent to a growth model with efficiency wedges, and they can explain a large fraction of fluctuations of aggregate data. Also, they uncover transmission mechanisms of more meanings. The counter-cycle policy should pay more attention the volatility of TFP, since policies which can affect TFP may be more efficient to have an effect on economic fluctuations.Then, we apply the BCA method to study the correlation between investment and output fluctuations, which has changed since2001. We adopt one basic model and two extended models. The main findings are that investment and output fluctuations are mainly affected by the efficiency wedges simultaneously before2000, which makes them to exhibit high and positive correlation-ship, and that investment fluctuations are also affected by the investment wedges heavily after2001, which makes their correlation-ship weaker. We also find that the labor transfers from the primary industry to the secondary and tertiary industries are mainly mapped into the efficiency wedges and that the excessive investment stimulating policies after2001cause a large and persistent investment wedges. These findings indicates that the business cycle policies should pay more attention to the effects of these factors which are mapped into the efficiency wedges, such as the labor transfers, on investments and outputs, instead of simply controlling the amounts of investments directly.Besides, we study inflation persistence in China from the perspecticve of specific shocks and common shocks. We empirically analysis the data from January2001to December2011, and find that disaggregated price indices obviously exhibit heterogeneous inflation volatilities and inflation persistence across sections, and that compared to aggregated price index, their inflation volatilities are larger and inflation persistence lower. These facts can be interpreted for the perspective of specific shocks and common shocks. The different importance of the relative importance of common shocks explains the heterogeneity of the inflation persistence of disaggregated price indices. The importance of specific shocks is weakened when disaggregated price indices are aggregated, which explains that disaggregated price indices are of lower inflation persistence than aggregated price index.