China's Economic Fluctuations

Real Business Cycle is a theory of business cycle which has founded and developed since 1980s. The research methods and Dynamic General Equilibrium models advocated by Real Business Cycle Theory has been the essential tools for the modern macroeconomic analysis. Real Business Cycle Theory has become the major school of macroeconomics against the new Keynesian macroeconomics, and provides a new theory and methods to understand the nature and the source of economic fluctuations. In recent years, domestic economists began to use Real Business Cycle Theory to analyze China's economic cyclical fluctuations.Although it appears on the Marxist Economics, Real Business Cycle Theory has not really reveal the source of business cycle and economic fluctuations, but it makes a valuable analysis on the causes and the role of business cycle in the level of economic operation. As a theory that studies on the operation of market economy, Real Business Cycle Theory is worth to be used for reference by China in transition, whose market mechanism is continuously improving. Real business cycle theory over the past 30 years has become one of contemporary macroeconomic theories, it has become the major classical forces that against the new Keynesian macroeconomics, and its research methods also occupy the dominant position of contemporary macroeconomic theories. Real Business Cycle Theory plays an important role and shows great vitality in the foreign economic research and policy-making. It can be expected, as China's market economy continues to improve and perfect, real business cycle theory will be playing a more important role in the economic practice of China. However, the further application of real business cycle theory must be based on the high external consistency of the models.Compared with the various real business cycle studies for the industrialized economies, the domestic theoretical and empirical study is still in its infancy. The Early domestic studies have shown that the baseline real business cycle model is indeed able to explain China's economic fluctuations, but its explanatory power has yet to be improved.One research line to improve the baseline RBC models is to introduce certain assumptions which'match the actual situation of China's economy better', such as the introduction of human capital, expectation deviation of the supply and demand in labor market and production market, etc. Although this research line does not obviously improve the model's ability to capture the stylized facts of China's economic fluctuations, as a pioneering study, it still gives some ideas for further study. Another research line to improve the baseline model goes from the major extensions of the standard Real Business Cycle Theory, and introduces more assumptions that match actual situation. This type of study includes the discussion of the extension of the labor market, the introduction of monetary shocks, the introduction of incomplete competitive market equilibrium, the introduction of open economy, etc. Comparatively speaking, the major extensions which focus on the post 1978 period and match the actual situation more precisely bring obvious improvement of the model's behaviors. It also provides a train of thought for future study.Overall, the existing studies of real business cycle have the following flaws: First, exogenous technological shocks as the major shock, can make the RBC models has a strong explanatory power, but productivity shifts as the measurement of the technological shocks ignore some important features. Second, the impact on other sources has not been discussed; except for the shocks of government spending, the stochastic shocks to supply and demand, monetary shocks and sunspot model. Comparatively speaking, the existing studies suggest government spending affect aggregate fluctuation obviously, but there still lack of the discussions about other shocks. Furthermore, the introduction of government spending shocks may also be insufficient to explain the cyclical fluctuations of some real aggregate variables. Third, while the different shocks has been introducing, most of the studies did not explicitly discuss the propagation mechanism that amplify and propagate the shocks to the economic environment, therefore it is difficult to understand the process and formation of economic fluctuations and the process of the form. Fourth, on the predictions of the main aggregate variables, the existing domestic studies the cyclical fluctuations of the main aggregates in terms of the predictions of output and consumption, it still lack of evaluation of other variables, and the divisible labor assumption widely used in domestic studies cannot reflect the fluctuations in employment. Fifth, the parameterization and calibration of domestic studies are not unified. Different studies are not based on the same data and the stylized facts. Moreover, there are also differences in the calibration, and they doesnot use of the available data to maximize the utilization of information.Under the framework of real business cycle theory, this dissertation introduces the constraints of the actual situation of China's economic fluctuations, to explore the emergence and formation of China's economic fluctuations. The starting point of this dissertation is to attempt and solve the flaws existence in domestic RBC studies, and to carry out a thorough examination covering labor market fluctuations, the different kinds and features of technological shocks, fiscal shocks and monetary shocks, etc. Besides the introduction of the difference sources of shocks, this dissertation also carries out a thorough examination about some different propagation mechanisms and their abilities to amplify and propagatie the shocks.The part of the introduction points out the purpose and significance of topics, as well as the research ideas, main content and logical framework. Chapter 1 introduces the background, theoretical characteristics and the basic point of view of Real Business Cycle Theory, and gives the literature review. Chapter 2 attempts to set up a baseline RBC models to describe the characteristics of China's economic fluctuations, combining of the existing domestic research results. Chapter 3 introduces indivisible labor assumption, government sector, labor hoarding mechanism and factor hoarding mechanism for further. Because of the interpretation of employment has been a problem in domestic studies, by preliminarily extending the assumptions related to labor input, this chapter gives a solution, and suggests the indivisible labor model that can solve this problem. Furthermore, Chapter 3 discusses and evaluates the effectiveness of the propagation mechanism of the introduction of government sector, labor hoarding and factor hoarding.Chapter 4 details a study the main sources of impact of real business cycle model, the technological shocks. Empirical evidence show that China's technological progress exhibits manifest biased technical change and investment-specific technical change features. This chapter introduces the biased technical change and investment-specific technical change into a basic Real-Business-Cycle model to investigate the effects brought by these non-neutral technical changes in the short-run. The result suggests the biased and investment-specific technical changes play an important role in the business cycle of China's economy. By the further investigating of the propagation mechanisms, this chapter demonstrates the contrasts and the effectiveness of these difference propagation mechanisms.Chapter 5 investigates another source of impact, the fiscal shocks. By the introductions of government spending, lump-sum taxes and distortionary taxes, it finds that the introduction of fiscal policy can effectively improve the effectiveness of the model, this result shows fiscal policy is an importance source of the formation to China's economic fluctuations.Chapter 6 investigates the monetary shocks, and attempts to use a monetary RBC model to investigate China's nominal aggregates in their characteristics of cyclical fluctuations. In this chapter, it finds that the introduction of the monetary shocks does not significantly improve the model's explanatory power, but allows the model to explain the volatility of nominal variables. It also believes that this lack of improvement could be solved from the introduction of several common propagation mechanisms of monetary RBC models.Chapter 7 is the last chapter of the dissertation. In summing up the conclusions of the dissertation, at the same time, this chapter gives direction for further research.The main innovations of this dissertation are as follows:First, the technological shock is the main source of the fluctuations in Real Business Cycle Theory. The dissertation discusses the impact of the technological shocks with different types and features on China's macroeconomic fluctuations. Due to Real Business Cycle Theory does not clearly distinct long-run and short-run analysis, the discussion about the characteristics and the impacts of the technological shocks also can be seen as, a demonstration of the impact of the technological changes of these types on the economic growth in China.Second, the existing domestic studies lack of investigations about propagation mechanism. This dissertation focuses on the spread of some common propagation mechanisms in their capacity of amplification and propagation for the main shocks. For the domestic business cycle research did not discuss the volatility of employment successfully, this dissertation removes this flaw by introducing the indivisible labor assumption. It makes the RBC models more logical to understand the employment fluctuations of China's economy, and it also provides a more efficient baseline propagation mechanism to research the aggregate fluctuations in China' economy. Furthermore, based on the indivisible labor model, the dissertation introduces government sector, labor hoarding and factor hoarding assumptions into the propagation mechanisms, and demonstrates their effectiveness.Third, the dissertation introduces fiscal and monetary shocks into RBC model. For the fiscal shocks, the existing domestic studies have only discussed the impact of government spending on the formation of China's economic fluctuations. In contrast, this dissertation investigates the fiscal shocks through the shocks brought by the government spending and distortionary taxes. At the same time, the dissertation argues that the existing study of the impact of government spending is not perfect and stills some issues, then gives some viable solutions. For the monetary shocks, the dissertation introduces monetary shocks into RBC model, in order to analyze the effect to economic fluctuations brought by the monetary policy. Most of existing research uses the reduced form model to analyze, but the structural model and dynamic general equilibrium model analysis are very rarely. In the framework of monetary real business cycle model, existing domestic research is not comprehensive enough. This dissertation uses a standard RBC model with cash-in-advance to investigate the impact of monetary shocks on the aggregate fluctuations, and evaluation the explanatory power of the model according to the quantitative results of the model.