Environmental Regulation And Economic Fluctuation In China(1996-2014)

China has become the world’s second largest economy, but the initial extensive development model has brought serious environmental problems. Although China’s environment regulation policy has become to mature since 1996, China’s Environment has been overloaded; the river’s quality continuing to decline and the number of days of fog continuing to rise is threatening our health. April 24,2014, the introducing of new environmental laws, have responsive to the people’s demand of the environment. The punishment of environmental violations will be more stringent, but it is also likely to cause a certain impact on the Chinese economy, destroying the stability of economic growth.Under this background, this paper gives a comprehensive overview about how the environmental regulation influences the economic fluctuation. Based on these, the paper has studied the relationship between environmental regulation and economic fluctuation in China by constructing the DSGE model of the heterogeneous intermediate manufacturer. After these, we use the economy data in China from 1996Q1 to 2014Q4 to estimate parameters, and use the Pulse response analysis and other tools to analysis the influence of environmental regulation shocks to the economy. We come to the following conclusions. First, Investment is the main way of impulse conduction of environmental regulation shocks, investment shocks, monetary policy shocks, pollution and clean manufacturer’s technical shocks, but the main way of the government expenditure shocks is the Consumption. Second, environmental regulation shocks, investment shocks, the shocks of polluting and clean manufacturer’s technology, can achieve the "win-win" of the overall output level and the improvement of environmental quality; The impact of tight monetary policy and expansionary government spending, result in a "dilemma" of the decline of the level of total output and the deterioration of environmental quality. Third, from the results of the forecast error variance decomposition, the main source of total output fluctuations is the technical shocks, environmental regulation shocks are not the main factors, and the main source of environmental quality fluctuations is the change of the technology of the polluting firms and the environmental policy. Four, from the sensitivity analysis of parameters, the higher the pollution coefficient is, the greater the inhibition effect of environmental policy on the total output is; the higher coefficient of environmental investment the economic is, the smaller influence the change of environmental policy to the degree of disturbance of the economic.