Adaptability Of Large Open Economy Model In China

China's economy is growing rapidly,which brings it huge size of economy and better state of Economic openness.All of these show china is on its way to a large open economy.However,previous studies have focused on closed economy model and small open economy model,when we make economic policies all these researches cannot answer whether we should choose Large Open Economy(LOE)Model logic or still hold on to Small Open Economy(SOE)Model logic.Existing large economy model's research is based on development economics,all these essays embark from the theory of endogenous power or population,so there is lack of research under Open Economy Macroeconomics.In such a realistic background,we conduct our research on the adaptability of Large Open Economy Model in China.The definition of LOE originates from the research of global trade under the classical economics,we define LOE is an economy that have pricing power to trade goods.With the development of economics,the definition is changing.Under Open Economy Macroeconomics,LOE is an economy can affect world interest rate level so it can change its own interest rate.From this definition,we start our research via Mundell-Fleming(M-F)Model.We analyze the effect of monetary policy and fiscal policy under different exchange rate regime,contrasting the results with formal SOE Model's results.By graphical method,we find that LOE's monetary policy is at work for output under fixed exchange rate regime,the results is different from what we got under SOE assumption which shows that monetary is long-term effective and short-term ineffective.We also analyze the effect of fiscal policy under fixed exchange rate regime,monetary policy under floating exchange rate regime and fiscal policy under floating exchange rate regime.Start form the definition of LOE,we analyze the time-varying characteristic of the influence form china's interests rate to the world interests rate level by TVP-VAR model.If china's interest rate change can make world interests rate changing in the same direction then we can say that China is fit to the definition of LOE.We choose America,Korea,Australia and Canada as world interest rate and we do the same operation to America.We find that china can move the fed funds rate in the same direction after economic crisis of 2008 and we cannot do the same to the other economies;America's FFR change can make all the economies' interest rate move in the same direction.By Hordahl's(2016)definition of the world interest rate level,China can affect the short end world interest rate level in the same direction but comparing with America China is not the complete LOE.Different form the SOE's monetary policy being short-term effective and long-term ineffective.LOE's monetary policy is always working.By this difference,we analyze the time-varying characteristic of the China's monetary policies'influence to China's output by TVP-VAR model.We also set America as the control group.We find that the priced monetary policy shows the characteristic of LOE and the quantitative monetary policy shows the characteristic of SOE;America's priced monetary policy shows the characteristic of SOE during the 2008 economic crisis.In conclusion,This dissertation suggests that with China's rapid economic growth and the improving condition of economic openness,China begin to show some characteristic of LOE.China can make FFR move in the same direction and the priced monetary policy shows the characteristic of LOE,but China cannot do the same to the other economies and China's quantitative monetary policy shows the characteristic of SOE.Compare with America,LOE model is still not applicable to China.