The Application Of Multi-sector Dynamic Stochastic General Equilibrium Model In China

The economy is consistent of multiple sectors, and these sectors are connected byinput-output relationships. Shocks are usually the cause of business cycles, which inmany cases are sectoral shocks, not the aggregate shock. So study the effects of thesectoral shocks on sectoral output and overall output are very important to understandthe business cycle, and make economic policies.This paper have introduced Long and Plosser's model as a basic model, and thenintroduced capital into the basic model. Then the paper do some simulations usingChinese parameters calibrated from the Chinese input-output table. The simulationresults indicate that there are three transmission mechanisms of sectoral shock: pushingeffect, pulling effect and substituting effect. The first two effects will increase theoutput of each sector under positive sectoral shock, but the last effect may not. Thesuperiority of the DSGE model is that this model can reveal the substituting effect butothers cannot.This paper have further established several7-sector DSGE models with theconstruction's capital and manufacturing's capital have constant input ratio, sectors'labor inputs have imperfect substitution, and introduced aggregate shock. Simulationresults show that the comovement in the business cycle is probably the result of theaggregate shock. These models better reflex the real economy, and offer a platform todo further economic experiments.From the simulation results, we conclude that when making industrial policies, thepolicy makers should consider not only pushing effect and pulling effect, but alsoconsider substituting effect. Furthermore, the policy makers should distinguish sectoralshock from aggregate shock as the effects is different. We can also see thatmanufacturing sector's positive exogenous shock will stimulate the economy most.