Research On China's Economic Fluctuation Under The DSGE Framework

The international community is not peaceful in the 21st century, that financial crisis, natural disasters, terrorism, political unrest, and other exogenous shocks have occurred one after another. Meanwhile, the economies of U.S. and other western countries enter into a slow growth period. All of the above bring great challenges for China's rapid and smooth economic development. China's economy has maintained a good growth rate, while the growth rate isn't stable, with the highest of 15.1% in 1993Q3 and the lowest of 6.5% in 2009Q3.Economic fluctuations lower social welfare. Using monetary policy to prevent economic fluctuations is a common practice among central banks all over the world. With regard to the current complicated international and domestic situation, China promulgated a series of monetary policy, which also shows that the policy makers want to employ monetary policy to regulate the economy. These phenomenons prompt us to understand the internal linkage about economic fluctuations and monetary policy, e.g., which kinds of shocks drive China's business fluctuation mainly? How well does monetary policy work? Does monetary policy shock help to weaken economic volatility? And what is an efficient monetary policy in front of exogenous shocks?Around the above research objective, the dissertation first summarizes the literature review and then constructs new Keynesian dynamic stochastic general equilibrium monetary policy (DSGE) model to investgate the problem of China's economic fluctuations, in order to give appropriate policy suggestions. Three parts construct the body of the dissertation. In the first part, literature review of economy fluctuations and the associated tools based on DSGE methodology are introduced. In the most significant second part, we deeply and systematically study the fluctuation of China's economy around monetary policy closely. Firstly we construct a simple DSGE model including inflation targeting in order to explore the existence of inflation teageting and its role on economic fluctuations. Then we expand the small scale model to contain financial accelerator effect and debt-deflation effect, to find how the credit frictions transmit through economy and their influence on monetary policy's transmission. Finally, a special supply shock, oil price shock is introduced to analysis economic fluctuations and efficient monetary policy problem. The third part puts forward relevant policy recommendations on the grounds of previous empirical results and the direction for future research.In the following we draw some meaningful conclusions. First, although China's monetary policy is not a fully inflation targeting rule, the dynamic endogenous inflation target could describe the central bank's unobservable policy objective to some extent. The results show that the target responds to productivity shocks positively, but makes negative response to consumer demand shocks. This kind of responses plays a stabilization role on inflation, but no obvious impact on output and employment. The inflation target shock is the main cause for inflation fluctuation. Second, in the DSGE model concluding financial market frictions, productivity shocks can explain most of the fluctuations of the output and inflation both in the short and long run. While the price markup shocks, wage markup shocks and financial shocks have some explanatory ability for inflation. Comparison with a frictionless model, we find that financial accelerator effect and debt-deflation effect jointly weaken the monetary policy, amplify productivity shocks, offset the contraction impact of consumer demand shocks, price markup shocks, and wage markup shocks partially. Third, Bayesian estimation indicates that China's monetary authority didn't react to oil price shocks. In other words, money supply mechanism didn't change its money supply according to oil price shocks endogenously. However, money supply growth rate has made a significant negative response to inflation and output. Policy frontier suggests that the presence of oil price shocks increase the volatility of output and inflation. Thus an efficient monetary policy should not only respond to output and inflation, but also the oil price shocks.The main contribution of the dissertation is the comprehensive application of a variety of tools based on DSGE framework, like historical decomposition, forecast error variance decomposition, monetary policy counterfactual simulation analysis, Bayesian parameter estimation. Furthermore, we linearize the optimal pricing equation around a positive mean value instead of usually zero inflation steady state. In addition, financial accelerator effect is stronger than debt-deflation effect is obtained as a new conclusion.