Dynamic Effects Of Government Spending Shocks In China

From the year of 2003 to 2007, the Chinese economy encountered a new growth path; annual average growth rate of GDP is over 10% for five years.In 2007, the growth rate arrives at 13%, which is the highest in the new century. The Chinese government made a growth miracle. However, the global economic situation changed dramatically in 2007. At the end of 2007, subprime crisis erupted from the United States of America; it quickly turned into financial crisis, and finally became global economic crisis. To deal with the problem of dramatic drop of asset prices, increasing price of raw materials, and shaking confidence, the governments implemented a basket of rescue plans, such as expansionary fiscal policy and monetary policy and so on. Also, the Chinese government released 4-Trillion Yuan Stimulus Package to deal with the slowdown of economic growth rate, in order to stimulate the short run aggregate demand, and help the Chinese economy to walk out the downturn path.Since a long time ago, there were two different opinions about the role of fiscal policy as a counter-cyclical tool. On one hand, some economists asserted that discretionary fiscal policy should be implemented when the economic slowdown is caused by the economy deviate from the steady state, not the fundamental factor of market, e.g. the slowdown of productivity. On the other hand, some economists believed that usually the fiscal policy is ineffective, and sometimes makes things worse. That is because the fiscal policy has very long lag effects, and it causes a number of distortions to the economy. So they think the automatic stabilizer should be as the best counter-cyclical tool. Hence, this paper tries to use the modern macroeconomic tool, i.e., the DSGE model to analyze the dynamic effects of government spending shocks in China. To investigate both from the theoretical perspective and the practical perspective which government spending is the most effective counter-cyclical tool. To analyze whether the 4-Trillion Yuan Stimulus Package can crowd in or crow out private consumption and private investment.To shed some light for future macroeconomic regulatory.This paper mainly focuses on two aspects. First, to investigate whether the neoclassical or new-Keynesian paradigm more suitable in analyzing government spending shocks in China; Second, Using empirical and positive method to analyze the dynamic effects of different kinds of government spending shocks in the goods market, i.e., to analyze which kind of government spending is the most effective counter-cyclical tool.We follow the basic step of modern macroeconomic analysis. First, the stylized facts of dynamic effects of government spending shocks are identified; second, a DSGE model (artificial economy) is set up to match the identified stylized facts. The whole paper consists of five chapters. It is organized as follows:Chapter one, introduction, the theoretical and practical background of this paper is analyzed. And the organization of the whole paper is laid out.Chapter two, literature review, the deficiency of current research is pointed out through reviewing the foreign and domestic literature, and the basis thought of this paper is given.Chapter three, stylized facts of the dynamic effects of government spending shocks in China, the main three methods of identifying fiscal shocks are reviewed firstly, including the "dummy variable" approach, SVAR approach, and sign restriction approach, then the dynamic effects of government spending shocks in China are analyzed based on the SVAR approach.Chapter four, theoretical model, a DSGE model is constructed based on the stylized facts of chapter three. According to the model settings, the model consists of the fully flexible price neoclassical and sticky price new Keynesian DSGE model. It is investigated which kind of model can match the stylized facts better, and the transmission mechanism is analyzed based on the theoretical model.Chapter five, conclusion, the main conclusions and policy suggestions are given.There are three innovation of this research. First, the dynamic effects of government spending shocks are analyzed from the DSGE perspective; second, a model consists of both the RBC model and NK model is set up, and it is illustrated that the NK paradigm is more suitable for analyzing dynamic effects of government spending shocks in China, and the transmission mechanism is analyzed; third, the structure of government spending is analyzed, different effects of each spending are investigated.