An Econometric Study On The Business Cycle Volatility And The Effective Mechanism Of Economic Policy In China

Sincel978, it is amazed to find economic achievement of my country all over world. GDP is increasing continuously and steadily by increasing velocity about 9%at average. Though "hot economic" behavior was appeared on one occasion in the past, and "soft landing" is vanished instantly by exogenous economic crisis, but my country achievement in economic development is known as a world miracle. Studying the effective mechanism of economical policy of economic growth and business cycle volatilities in china will make for "good and fast" long wave trend of economical growth in china. Based on the background, economical growth trends and business cycle volatilities behavior and macroeconomic operation data are analyzed on the period fixed on 1978-2008. In this paper, economical growth trends, business cycle volatilities and the effective mechanism of economical policy have been studied by the macroeconomic growth and business cycle volatility theory and econometric theory.Modern economic growth and business cycle volatility theory is summarized in this paper. The stylized facts, long wave trace and country economic, and economical policy effects and macroeconomic adjustment and control patterns in Chinese economic growth and business cycle volatility have been studied in detail by these theory and econometric tools. We have the following important results in these studying.1 Applying my country 1953-2008 yearly GDP,1980-2008 nominal seasonal GDP and 1983.1-2007.6 monthly cycle ratio CPI, three stages of china's economic growth and business cycle volatility in the 30 years of reform and opening-"high volatility low velocity growth", "low volatility proper velocity growth" and "harmonic volatility high velocity growth", are captured by the H-P filter.Furthermore, defining three stages as three state variables, and being brought into simultaneously a three-state Markov-Switching Mean-Variance of nominal seasonal GDP, MSMH(3)-AR(5) model is modeled. The following results are presented by the model.There are asymmetric structural breaks significantly in china's economic growth and business cycle volatility processes. That is, the transition probabilities are different in different stages of mean process and variance process; the sustained probabilities and expected duration are different in different stages, where "low volatility proper velocity" regime has the longest expected duration, is the best stability among the three regime; the three regime smoothing probabilities are different also. China'economic operates on "low volatility proper velocity" regime.2 Applying china's industry output increasing value, CP1 and M1 from 1990.1 to 2007.12, based on Logistic function characteristic, LSVAR(3) model is modeled by choosing transition function as Logistic function for depicting monotony and regime transition asymmetry of monetary policies. The following results are presented by the model.Shocks of monetary policies on output are asymmetric. Namely, the response of output to tight-monetary shock is more active than one to positive in low growth regime, and the response of output to tight-monetary shock is more inactive than one to positive in high growth regime; the response of output to large scale positive monetary shock is more active than small positive monetary shock in low growth regime, and the response of output to large scale positive monetary shock is less active than small one in high growth regime; For positive or tight monetary shock, the response of output to monetary shock in low growth regime is larger than one in high growth.Shocks of monetary policies on inflation are asymmetric. In other words, the response of inflation to positive monetary shock is more active than one to tight in low growth regime, and the response of inflation to positive shock is more inactive than one to tight in high growth regime; the response of inflation to large scale positive monetary shock is smaller than small positive monetary shock in low growth regime, and the response of inflation to large scale positive monetary shock is less larger than small one in high growth regime; For positive or tight monetary shock, the response of inflation to monetary shock in low growth regime is larger than one in high growth.The tight-monetary shock makes output growth, and positive monetary shock makes output decay in high growth regime. In other words, the relationship between the aggregate supply and the aggregate demand is nonlinear and the aggregate supply curve is convex upward.3 Applying china's industry output increment value, CPI, fiscal budget payment, total tax income and monetary Ml monthly from 1990.1—2007.12, we gain log growth rate of industry output increment value, CPI and M1. And there are unit root and ARCH behavior in log growth rate of industry output increment value, CPI and M1 by test.Firstly, using log growth rate of these variables, we make of VAR(3) model, and make impulse response and Granger causality analysis. The following results are obtained.The growth of industry output increment value on positive monetary policy is action than positive fiscal payment, and there is "crowding effect" in economic behavior. The growth of industry output increment value on tax income shock is negative. The response of growth of CPI on positive fiscal payment is negative, namely, the relationship between the aggregate supply and the aggregate demand is nonlinear and the aggregate supply curve is convex upward. The response of CPI on tax income on tax income positive shock is positive, and on monetary shock also. The growth of output reduces rise of CPI, fiscal payment does weakly Granger cause CPI, tax and monetary strongly Granger causes CPI, but monetary action is larger.Secondly, using H-P filter tool, the cycle series of log growth of industry increment value and the cycle series of growth of CPI are attained. Two GARCH(1,0) models are modeled firstly respectively using two new cycle series and fiscal, tax income. Next another two GARCH(1,0) models are modeled respectively using two new cycle series and fiscal, tax income and M1 for comparing effectiveness of fiscal and monetary policies on economical volatility. The following results are obtained.The volatilities of growth rate of industry increment value about "natural rate of growth" are impacted significantly by fiscal payment, tax income and monetary M1; the shocks of tax income and monetary policies on the growth of industry output increment value are positive, and fiscal payment is reverse; the volatilities of growth rate of CPI about "natural rate of growth" are not impact significantly by fiscal policy and monetary policy, and the volatilities of CPI come from shocks of output. The models containing only fiscal payment and tax income and the models containing simultaneously fiscal payment, tax income and M1 show all significantly that fiscal policy has effect of "built-in stabilizers" and also Chinese fiscal policy superior to monetary policy in threshold of volatility.Finally, being different from discussing relations of industry output and CPI growth uncertainty and macroeconomic policies by picking up uncertainty of growth of industry output and CPI, we make of AR(2)-GARCH(1,0) model for growth rate of industry increment and AR(1)-GARCH(1,0)model for growth rate of CPI in order to analyze relation of uncertainties and policies, where, variance process contains directly policies variables. To compare effectiveness of fiscal policy and monetary policy, we firstly make of model containing only fiscal policy, next model containing fiscal policy and monetary policy simultaneously. The following results are presented by the models.The uncertainty of growth rate of industry increment value is impacted positively by growth rate of tax income, negatively by monetary, and weakly impacted negatively by fiscal payment; impact of monetary M1 on the uncertainty of growth rate of industry increment value is large than tax income. The uncertainty of growth rate of CPI is impacted positively by fiscal payment and monetary M1, but impact of M1 is large than fiscal payment; the growth rate of monetary is important causation of uncertainty of CPI, the other way round, impact of fiscal payment is only 0.0375 time of monetary on uncertainty of CPI; the uncertainty of growth rate of CPI is impacted negatively by tax income, namely, increasing tax income will reduce uncertainty of CPI. The models containing only fiscal policy and models containing simultaneously fiscal policy and monetary policy show all that the effectiveness of fiscal policy on output growth and CPI growth is smaller than monetary policy. The effects of "built-in stabilizers" for fiscal policy are presented further. The results obtained demonstrate that positive fiscal policy is leader and positive monetary policy is complement in expanding demand, and negative monetary policy is leader and negative fiscal policy is complement in contracting demand.4 Applying china's growth velocity rate of industry increment value from 1990.1-2007.12, using H-P filter tool, we analyze long wave characteristic of economic growth and business cycle volatility. And, bringing uncertainty of industry output into mean process of ARIMA-GARCH model, we have made of a model noted by ARIMA-GARCH-M(1,0,1;0,2). Based on this model, picking up uncertainty series of growth velocity rate of industry output increment value, we make impose response and Granger causality analysis. The following results are gained.There is long wave characteristic of three stages in china's economic growth and business cycle volatility significantly. The long wave is a wavelet of fluctuating about "natural rate growth". In china' economic growth the level of "natural rate growth" is approximately 9%.There is a geometric decaying memory characteristic significantly in output growth, and there is a short-run memory behavior in uncertainty process of output growth. The correlation of output growth and uncertainty of output growth is positive, and uncertainty of output growth is caused by output growth, reversely, it does not hold. High (low) output growth will reduce strong (weak) uncertainty of output growth, in other words, high (low) output growth reduce high (low) country economic risk.The target of macroeconomic policies is that average velocity of economic growth would be approximately level of "natural rate growth" in china.