An Analysis On The Effects Of Aggregate Supply And Demand Shocks On China's Economic Fluctuations

In this paper we extends the Blanchard and Quah's two-variable structural vector autoregression(SVAR's) model based on the assumptions of a new Keynesian's IS-LM-Phillips curves model, which was the central paradigm of Keynesian economics and establish a four-variable SVAR model consisting of output, price, real interest and monetary supply, which was characterized by a multivariate process driven by four exogenous disturbances.Based on the long restriction, those disturbances could be identified so that they can be interpreted as four main sources of fluctuations found in the IS-LM-Phillips curves model: money supply, money demand, IS and aggregate supply shocks. The dynamic property of the estimated model are analyzed and shown to match most of the stylized predictions of the model. The estimated decomposition is also used to measure the relative importance of each shock, to interpret some macroeconomic episodes, and to study sources of permanent shocks to nominal variables.Several conclusions arise from the study of the estimated structural VAR model as follows:a. The dynamic response of economy of China to different type of disturbances highly matches most of the qualitative predictions of augmented IS-LM-Phillips framework. Especially, there're no long-run effects of demand shocks to real output, but supply shocks can impose permanently long-run effects on real output.b. With the help of technology of analysis called historical decomposition, we findsomething important------there're real output cycle and inflation(CPI) cycle existingwhich match closely from 1996 to 2008.The demand component plays the leading role of CPI fluctuation and it also can affect real output fluctuation considerably. But different styles of demand shock have different effects. Any of monetary policy and fiscal policy does not have a effect on china's economic as people expected. They must work together. Traditionally, short-run supply policies were neglected by economic authority. It would have a great effect on economic short-run fluctuations. So, in short run, some short-run supply policies can help economy keep healthy.The supply component plays the leading role of real output fluctuation and it also has considerably effect on CPI fluctuation. Supply shocks is the only factor can simultaneously explain "high economic growth, high fluctuation and low inflation" which is special economic phenomena of China.We should attach great importance on supply policy in order to make economy growth and stability, especially in the long run.