Asset Bubble And Economic Fluctuation Under Financial Accelerator Mechanism In The Case Of Chinabefore And After The Subprime Crisis

In this paper, the relationship between asset bubble and economic fluctuation is studied by using the BGG model considering asset bubble. The BGG model is a dynamic new Keynesian macroeconomic model constructed by Bernanke, Gertler and Gilchrist. Based on financial accelerator, the model has become one of the fundamental frameworks in current macroeconomic analysis since its generalization and powerful explanation to real society. As asset price bubble is introduced into BGG model by Bernanke and Gertler, the asset price’s bias to value can be used to simulate asset bubble’s influence to economy. The BGG model can be used to explain China’s economic fluctuation after sub-prime mortgage crisis and to study the influence of different monetary and fiscal policies.At first, the research of financial accelerator combining RBC model, asymmetry, open economy, bubble economy and industry location is reviewed. And it is found that so far nobody uses BGG model which considers asset bubble to analyze China’s economy. Secondly, the classic financial accelerator model’s premises, mechanism and results are represented and the financial accelerator model’s difference between new classical model and new Keynesian model is concluded in this paper. Finally, the asset bubble is introduced to BGG model and the system consisting of enterprise net value, investment scale and asset bubble is created.If the financial accelerator mechanism and asset bubble can be found in China then the BGG model considering asset bubble can be used. In this paper, when sub-prime mortgage crisis came, the proportion of small companies’ short-term debt decreased significantly than sizeable enterprises, which means that financial accelerator’s credit asset movement exists in China economy. And by calculating ROA and ROE of companies which are in stock market and calculating real estate price index fluctuation, it can be proved that bubble exists in China’s key assets. Considering empirical analysis in former papers, we can conclude that the financial accelerator mechanism and asset bubble do exist in China. In this paper, the BGG model’s22parameters are estimated by statistics, econometrics and bibliography. Comparing to other papers’ parameter estimation, the estimation made in this paper uses more authoritative statistical data and more sophisticate means. As a result, the parameters estimation made in this paper are more accurate and some parameters are rather different from the ones estimated in former papers.At last, by using model we analyze China economy’s real fluctuation around sub-prime mortgage crisis and numerical simulation results. The real fluctuation of China’s output, investment and inflation can be computed and can be used as comparison to simulation results. The numerical simulation results show that an economy having bubble fluctuates bigger than an economy doesn’t have, the monetary policy pegging asset bubble can stop large fluctuation while its influence to negative output fluctuation are weaker than to positive output fluctuation in crisis, positive fiscal policy can decrease adverse shock’s influence while the excessive investment stimulation leads to bigger economy fluctuation. China’s real economy fluctuation is in accordance with the simulation results estimated from the model that has pegged-bubble monetary policy and active fiscal policy.