An Empirical Analysis Of Business Fluctuations Under Financial Frictions In China

Economic growth and business fluctuation has been a main research topic in the field of macroeconomics, many experts and scholars have been researching on the sources and features of China’s business fluctuations by using econometric tools for analysis and test. Business fluctuations theory originated from the stylized facts of European and American countries economic expansion and recession, and with China’s rapid economic growth, the influence of business fluctuations on economy’s stabilization gradually showed significant. Meanwhile, each economic variables also reflects the trend of fluctuations, such as output fluctuations, investment fluctuations, interest rate fluctuations and the rate of inflation fluctuations, etc, which have significantly impact on not only on the stable and development of macroeconomic fluctuations, but also on overall social welfare. Then, first proposing that analyze the macroeconomic under financial frictions, BGG(1999) add price stickiness and wage stickiness into the New Keynesian model, and study the amplification effect of financial accelerator on business fluctuations by dynamic stochastic general equilibrium model. After that, through add financial frictions into the model in the form of information asymmetry in the moral hazard, Gertler and Karadi(2011) measure how much the financial frictions enlarge financial shocks and the transmission to other departments of the system in the Subprime Crisis, and eventually produce huge business fluctuations which leading to an economic crisis. At present, while our country is in the important periods of structural reformation, financial market gradually transforms from the original government regulation to independently regulate the market, so it is important to put high attention to financial frictions.Basing on the theory of financial frictions and financial accelerator, we has built a New Keyensian model with financial frictions and price stickiness in order to analyze the influence of financial frictions on the business fluctuations. In addition, we add technology shock, capital quality shock, monetary policy shock and inflation shock into model, of which capital quality shock equals to the financial shock. These shocks are amplified and transmitted to other departments in the system through bank balance sheets, as well as the capital quality shock as financial shock impact on economic variables. On the one hand, we analyzed the amplification effect of financial frictions on exogenous shocks and the transmission effect of bank balance sheets. On the other hand, under the circumstance of financial frictions, whether monetary policy could put counter-cycle affect and stabilize the deviations.Therefore, we used the macroeconomic data from the first quarter of 1996 to the fourth quarter of 2015, and adopted parameters calibration method and bayesian estimation in structure parameters of the model and the last coefficient and fluctuation coefficient of exogenous shocks. Then, we measured single exogenous shock to the various endogenous variable fluctuations by impulse response function, and multiple shocks to the single endogenous variable fluctuations by variance decompositions. The result shows that:The New Keynesian model with financial frictions could effectively depict the macro economy in China, and according to the bayesian estimation, the structural parameters are also within the 90% confidence interval and performance significantly. As the financial friction coefficient decreases, leverage rate of banks and other financial intermediation sectors which it reverse to the financial frictions would rise, thereby expanding the total assets of the project in the bank balance sheets. Eventually it would amplify exogenous shocks through the balance sheet channel and transmission to other departments in the system. Hence, the changes of financial frictions would amplify the deviation and the peak value of the economic variables after unit shock in the impulse response functions, and variance decomposition analysis showed that as the friction coefficient decreased, the contribution to the economic variables of capital quality shock increased gradually. Moreover, monetary policy shock showed a significant counter cyclical influence and regulative feature in the short term, which can be thought that monetary policy, especially the interest rate policy, can be used as an effective policy tool to smooth the business fluctuations in the short term. Otherwise, the long lagged capital quality shock also alerted us on the high risk of the financial market.