Theory And Application Of China 's Quarterly Macroeconomic Model

In recent years, the international economic situation is becoming increasinglycomplex, and with the deepening degree of the Market economy, China’s economicdevelopment is also facing many new problems and challenges. Both the governmentand scholars have tried to find an appropriate analytical tool, and macroeconomicmodel is exactly in line with people’s needs. Macroeconomic model is a simulation ofthe real economy and with the help of basic data, economic theory and econometricmethods, it has become an effective tool to study macroeconomic issues.The construction of macroeconomic models already has a long history. In UnitedStates and other developed countries, they have been widely used in early periods.This kind of work started relatively late in China and most of the macroeconomicmodels in our country were constructed by annual data. In recent years, with the helpof improving technical tools and in order to cope with the complexity of real economy,many researchers are interested in quarterly models which are more flexible thanannually models.Based on the existing macroeconomic models and the operation of China’seconomy, a quarterly simultaneous equations model is constructed in this Master’sthesis. This model starts from different aspects of macroeconomic, such as incomeand consumption, and its ultimate point is the GDP in expenditure approach. Thewhole model consists of different behavioral equations and identities; they are thebasis of forecast and simulation.This thesis is divided into five chapters. The first chapter is an introduction aboutresearch purposes. Chapter2briefly presents the operating mechanism of thisquarterly model. Chapter3and chapter4are the core of this thesis which describe theconstruction procedures and applications of this model. The final chapter is asummary that identifing shortcomings of this model.This macroeconomic model is based on quarterly data of China and the samplestarts from the first quarter of1992to the fourth quarter of2012. Before modeling,87initial variables were created according to the raw data. The entire model consists of27behavioral equations and37identities, covering seven major economic modules:income, consumption, investment, government sector, foreign trade, finance and price.In different modules, relevant economic theories have been sorted out, such as thetheory of production, consumption theory and international trade theory; thesetheories constitute the theoretical basis of the behavioral equations. Futheremore, historial data and graphics are used in this paper which reflecting the changes ofChina’s economy since1992, and these analysis provides realistic basis for theequations.Since most economic variables are non-stationary time series, cointegrationtheory is the main econometric tanalysis tool in this model. Most behavioral equationsare estimated in the form of Error Correction models (ECM) with which the long-runequilibrium and short-term fluctuations in economic behaviors can be characterized atthe same time. Except for behavioral equations, the identities were added in order tosolve the whole model simultaneously and systematically.The software of Eviews6.0was chosen for the empirical analysis of this model.Four programs were used respectively for the frequency conversion of raw data, theestimation of behavioral equations, etc. Programming has greatly improved theefficiency of model solving and scenarios simulation afterwards.To test the model’s quality and effectiveness, the main macroeconomic variablesin this model are predicted for2013to2015. For policy analysis, different simulatingscenarios are created according to the changes in policy variables, such as twoendogenous variables, exchange rate, world trade and one exogenous variable, M1.Based on the results of policy simulations, some suggestions are provided in thispaper. In the coming period, China should avoid the sharp appreciation of the RMB inthe short term and take opportunities of the recovery of international trade. In thefuture, foreign trade should continue to promote China’s economic growth. At thesame time, it is necessary to keep the money supply adapting to economicdevelopment in order to maintain a stable price level.In summary, this quarterly model can to some extent simulate the overalloperation of China’s economy. It can also shed some light on economic forecast andmacroeconomic policy analysis in China.