The RBC Explain Of Chinese Business Cycle

The economy of China has been keeping rapid growth since China's reform and opening policy, but its sharp fluctuation also amazes the world at the same time. This phenomenon attracts much attention of many scholars in China and they try to explain it using all kinds of theories. Different from the existing research which mainly explain the economic fluctuation of China from the aspect of demand, we try to inspect the characteristic of cycle during the development of China's economy using the real business cycle model (RBC model) which focuses on the aspect of supply. This model believes that the fluctuation of economy lies in the random shock of technology. This essay conforms to the following steps. First, we set up a simple RBC model, which just takes account of producers and consumers without government and other countries. Then, we use Calibration to decide the parameters of this model according to the real situation of China's economy. After that, we use the RBC model after Calibration to simulate the economy fluctuation and to calculate the matrix of output (the coefficients of auto-correlation, standard error). We also obtain the matrix of real output after eliminating the time trend in the statistics of China's economy from 1978 to 2004. At last, we estimate the fitness of the model through comparison of these two. As the result shows, the fitness of this model reaches 74%. This indicates that RBC can also explain the economic fluctuation of China to a satisfying degree. Therefore, we believe that our government should consider the suggestions of RBC, i.e, to reduce government interfere with economy.