An Econometric Analysis On Internal Correlation And Effects Between Nominal Shocks And Real Shocks In China

Economic shocks have ever been the focus of such economic schools, theories and disciplines as Monetary School, Neoclassical Macroeconomic School, Real Business cycle Theory, Keynes Economics and Neo-Keynes Economics since Frisch first brought forward operation mechanism and transmission mechanism of economic shocks in economic fluctuation and depicted the forming process of business cycle under the influence of endogenous random shocks in 1933. Economic shocks have still been the core of economic policy theories and business cycle theories though opinions vary on such basic principles as forming mechanism, operation mechanism and transmission mechanism of economic shocks. Nowadays, the research on economic shocks and their transmission mechanism are of most flourish and significant in macroeconomics.A systematic study of economic shocks can improve macroeconomic theories and methods and will definitely speed up the formation of newly-integrated macroeconomic theories. Therefore, from the perspective of macroeconomics, a detailed investigation into the correlation between nominal shocks and real shocks will be carried on in this thesis by employing several classical econometrics'models and methods. Based on some basics about the economic development of China, some important empirical results will then come into existence which will consequently bring forth some economic policy beneficial to the rapid development in the economy of China.1. A summary of academic research on nominal shocks and real shocks In macroeconomic system, the effectiveness, sensitivity and solidity of economic policy rely on various operation mechanism and transmission mechanism of economic shocks deduced by economic policy. By depicting the model system of economic shocks and their transmission mechanism, the operation mechanism and transmission mechanism of real shocks and nominal shocks, endogenous shocks and exogenous shocks will be analyzed so as to identify shock sources and shock forces, to depict the effect of economic shocks on various inter-temporal substitution and constraints, to solve such important problems as shock targets and shock effects, finally, to demonstrate some important economic propositions and to elicit some important implications on economic policies in the course of synthesizing economic shock theories in modern macroeconomic schools.2. A theoretical model of the correlation between economic configurationsAfter a detailed analysis of the nominal shocks and the real shocks in macroeconomic system, comes the key theoretical foundation of the thesis—a theoretical model of the correlation between macroeconomic shocks, that is, the proposition of the classical dichotomy and the money neutrality. The key theory consists in a detailed account of the proposition of the classical dichotomy and the money neutrality in the classical macroeconomic models in which exists the earliest exploration of the relationship between nominal shocks and real shocks and a detailed description of its inference.3. A test of the correlation between nominal shocks and real shocks in ChinaThrough a quantitative analysis of the mutual effects between the nominal shocks and the real shocks in China with regard to scales and volatilities, it is found out that there are distinct"spillover effects"of the nominal shocks on the real shocks and, on the other hand, obvious feedback effects of real shocks on nominal shocks. Moreover, the feedback process is characterized by regularity and sensitivity. The evidence claims that it has a real effect to expand gross money supply and augment price adjustments in nominal demand management policies. And the coordinative development of the nominal shocks and the real shocks is not only the foundation of policy effectiveness and also the necessary condition of the rapid and stable growth.For further research on the correlation between nominal shocks and real shocks in China, co-integration, ECM and Granger causality models are applied in the thesis to the analysis of the interrelation among real, monetary and financial variables and their fluctuation patterns. The results prove that there exists remarkable co-integration among these variables and monetary and financial variables could be the leading indicators of real economic activities. Despite the inflation rate and real interest rate induced into the model, the interrelation among these variables is not in the remarkable enforcement, which implies that inflation rates and interest rates act only as conductors between nominal shocks and real shocks. What's more remarkable, the weaker feedback effects of real shocks on monetary and financial variables are somewhat related to deflation and short of aggregate demand.4. A test of inter-operation mechanism of inflation in the correlation between nominal shocks and real shocksIf there exists some correlation between nominal shocks and real shocks, there should be some mechanism which connects nominal shocks and real shocks in the economic function and which might be the economic policy tools or policy targets such as price level (inflation rates), interest rates, exchange rates. However, how does this mechanism work between nominal shocks and real shocks? To answer this question, the author of this thesis carries out a test on the inter-operation mechanism of inflation rates in the correlation between nominal shocks and real shocks in China with price level inflation or deflation as the correlative tool between nominal shocks and real shocks and analyses of the dynamic correlation between variables and of impulse function. Meanwhile, the threshold auto-regression model is also applied to the test of the relationship between nominal shocks and real shocks in different threshold areas, in order to depict the agility of price adjustment in nominal shocks and real shocks. Some typical facts about the correlation between nominal shocks and real shocks are elicited which can be taken as standards to verify the economic theories and to modify policy operation.5. An analysis of asymmetric effects of nominal shocks on real outputBy means of such econometrics methods as Markov regime-switching model and impulse response function, the dynamic relationship between nominal shocks and output in China gets a systematic test in this thesis. It is found out that there exist striking asymmetric effects of nominal shocks on real output and"low response"regimes and"high response"regimes in the response of real output to nominal shocks. Furthermore, by virtue of the time-varying transition probability (TVTP) model, three possible types of asymmetry gets a further test and account, that is, the direction and the scale of monetary policy and the phase of business cycle, through whose possible combination and interaction, the asymmetric effects of monetary policy reveal that the effects in recession are bigger than those in boom, the effects of large shocks are bigger than those of small shocks and the effects of negative shocks in combination with or interaction with phase of recession are bigger than those of positive shocks.