Research On The Transmission Mechanism Of Economic Cycle Fluctuations Under Open Conditions

With more and more important roles in development since the early 1990s, international trade and capital flow has been increasing their impact on the business cycle for one country. Against this background, it is necessary to make further explore on the business cycle in the open rather than closed economic conditions. Meanwhile, China's business cycle has also had new changes in external characteristics, reasons, and formation mechanism, compared to that one in early economic reform. This thesis tries to probe the formation mechanism of China's business cycle and its characteristics, considering China's economic operation, and using western business cycle theories for reference. It will have essential value to find out the law of China's business cycle, and to set up suitable policies to make China's economy growing continuous, stable and healthy.The main task for this thesis is to make thorough examination on the mechanism through which the global economic volatility affects China's economy, and its specific impact. For this goal, we employ multiple econometric methods in this thesis such as Vector Autoregressive Model, cointegration technology, impulse response function, Variance Decomposition, and so on.We find out the co-movement in business cycle among China, Japan, the United States, Eurozone, Russia, the United Kingdom, India, and Brazil. It is through international trade and financial business that the business cycle transmitted across countries. In this thesis, we explore this transmission through Macroeconomic and Middle-industrial levels.The economic growth of China's main trade partners continues to expand China's trade surplus, while the growth of China can release the unbalance in trade. RMB's appreciation has larger inhabitation on export than on import. These two kinds of impact, however, do not have additive property. The trade surplus does not reduce with the revalue of RMB. The appreciation does not worsen China's trade balance at once, and the surplus will increase further, which means that it has "J Effect" on the balance. The volatility of RMB exchange rate has negative impact on the export not on the import. Except for the factor of the export itself, its stability is mainly affected by the volatility of RMB exchange rate in the long run, while by the volatility of main trade partners'economy in the short term. The shock of import and export enhances the macroeconomic volatility, which reacts more drastic to the change of export.To examine how the global economic volatility is transmitted to and affects China's economy through the financial business, we taks the economic volatility of the United States as an example. The change of RMB exchange rate is opposite to that of U.S. Dollar rate. The People's Bank of China raises the interest rate when Federal Fund Rate is done by the Federal Reserve. China's economy is not only impacted by the volatility of American economy itself, but also done by the volatility of Federal Fund Rate, U.S. Real Effective Exchange Rate, U.S. stock index and oil price. U.S. Real Effective Rate has largest impact on China's Economy comes, while Federal Fund Rate has smallest impact. With the growth of U.S., there is positive relationship between U.S. Total Stock Index and China's growth. The volatility of the global oil price has also negative impact on China with a lag.To avoid the limitations of focusing mainly on the macroeconomic level in the former part, this thesis explores the impact of the volatility from the industrial level. We find out that, the trends of primary, secondary and tertiary industries are similar to that of China's export, while they have different cycle turning point date. Specifically, the export and the secondary industry have the same turning point date, which is earlier than that of the primary and tertiary industries. In the long run, with the growth of export, the contribution of the GDP share of the primary will decrease, while that of secondary and tertiary industries will increase. Note that the growth of export leads the share of the tertiary a faster rise than that of the secondary. In the short term, the shock of export increase leads rise in the contribution of GDP share of three industries, with relative long effect on the primary, short effect on the secondary, and a lag in effect on the tertiary.Totally, with the increase in the globalization, the economic volatility in one country can be transmitted to another country through the international trade and financial business, and have impact on the macro and industrial economy of the latter. Under this background, with more and more interaction between China and the world in international trade and financial business since the reform and reopening in 1978, we should play enough attention to the effect of the global business cycle on China's economy, and the roles of the international trade and financial business in it.