Aggregate Fluctuation And Production Structure Changes: Study On The Cyclical Fluctuations In China’s Economy Based On The Austrian Business Cycle Theory

Economic cycle, which is also called business cycle, refers to the recurrent cycling phenomena of expansion and contraction in economic activities, and it has always been one of the most pressing questions in economic research both at home and abroad. Although China’s economy has been in a state of rapid growth in general since its reform and opening up, it also exhibits significant cyclical fluctuations. In particular, China’s growth rates in GDP have been declining for 19 consecutive quarters from 2010, which causes widespread concern among the public in recent years. Thus, it is an important task, as well as a challenge, for academics and policy makers to correctly explain China’s business fluctuations and to take appropriate measures to deal with it.Previous studies based on Keynesian Economics or Real Business Cycle Theory have obvious flaws. This study conducts a theoretical and empirical research on the cyclical fluctuations in Chinese economy by the Austrian Business Cycle Theory (ABCT). Seeing artificial credit expansion as the main perpetrator for the cyclical fluctuations, which causes serious distortions in production structure, this study provides a new angle and a more systematic analysis framework to reveal the mechanism of China’s cyclical fluctuations.Firstly, by carefully clarifying ABCT and identifying its core concepts, we lay a solid theoretical foundation for the following empirical research.Secondly, by using China’s quarterly time series data from 1995 to 2014, the study examined the relationships between the main economic aggregates in the framework of ABCT. The results show that the growth in money supply directly leads to loan credit expansion and the deviation between market interest rate and natural interest rate. But the relationships between interest rates and bank credit are not clear due to the low level in interest rate liberalization. Both the interest deviation and changes in the production structure have significant impacts on the gross output fluctuations. The interest deviation, the ratio of investment to consumption, and the ratio of investment index to consumption index together account for 52.9% of the variation in gross output. Thus, this study, which is based on China’s main economic aggregates, provides empirical evidence to support ABCT.Thirdly, the study investigated changes in production structure resulting from credit expansion with the annual input-output data of China’s 35 industries from 1995 to 2011. The results show that production structure becomes more roundabout and output price indexes increase in the expansion phase, but output prices index of higher production stages increase more rapidly than that of lower stages. In the contraction phase, the roundaboutness of production structure decrease, and output prices indexes of higher production stages decrease more rapidly than that of lower stages. The results also suggest that the artificially lowed interest rate is the Granger cause of changes in the roundaboutness of production structure. Thus, empirical study on changes in production structure lends support to ABCT again.Finally, the results of our study are summarized and some implications are provided. In addition, the major issue of the supply-side reform is reviewed from the perspective of ABCT and the under-consumption and over capacity issues are analyzed as well.