The Impact Of FDI On Macroeconomic Fluctuations Of China

With the gradual deepening of China’s opening-up, massive FDI flowed into China and China has replaced the United States and became the nation which is absorbing the most FDI in the world in2012.The inflow of FDI has made a broad and deep impact on China’s economy. Especially, after the outbreak of the financial crisis in2008, the fluctuation of FDI has become a significant external factor affecting China’s economic fluctuations. Nowadays, the international economic environment is still unstable and the European debt crisis is still uncertain, volatile external environment increases impact of FDI’fluctuation on China’s economy. FDI changes credit constraint and asset prices which affect the domestic investment and production decisions, as well as household consumption and savings behavior and further cause economic volatility through the financial accelerator effect. Therefore, It has important theoretical and practical significance to research the mechanism of FDI’s impact on economic fluctuations and establish prevention and cushioning mechanism.The paper aims to protect our economic stability from FDI shocks. Guided by the systematic, dynamic and sustainable research ideas, this paper make a theoretical study about mechanism of FDI’s impact on economic fluctuations. We develop a DSGE model under open economy and added financial accelerator effect into the model. By simulating the dynamic effect of FDI’s positive shock on China’s economy with MATLAB software, we draw the conclusion as follows:First of all, the changes of FDI do enlarge economic fluctuations through the financial accelerator effect in the short term. Simulation results confirm that the changes of FDI change the asset prices, balance sheets and external financing premium of the enterprises, which affect the investment and production decisions of the enterprises, resulting in economic fluctuations. Secondly, the inflow of FDI has positive impact on China’s investment, exports, consumption and output. After the positive shock of FDI, investment, domestic consumption and output increase significantly and reached a higher steady state value, exports fall and then gradually increase because of the appreciation of RMB, which reflecting that the inflow of FDI has positive impact on China’s investments, exports, consumption and output. Finally, although the changes of FDI influence China’s economic fluctuations, especially the outflow of FDI will seriously affect the China’s economic stability. But generally, economic fluctuations of the host country brought about by the changes of FDI were reflected in the short term, FDI has far more positive effects on China’s economy than the negative effects in the long term. Researching the mechanism of FDI’s impact on economic fluctuations will help China to take more rational approaches to guide FDI and reduce economic fluctuations brought by the changes of FDI. The result of the project will contribute a lot for China to make a regulation in promoting macroeconomic control to suit external environment changes and maintain economic stability.