The Effects Of The Volatility Of Electricity Price On China’s Macro-economy

With rapid development of economy in China since 2000, the contradictions between the demand and the supply of electric power is becoming more and more serious. To ease the contradictions, reduce the electricity price’s distortions, adapt to the requirement of building Chinese socialist market economy system, China is gradually pushing forward electric power system reform, break the monopoly of power industry, introduce competition mechanism to electric power management, perfect the market allocation of electric power resources. In addition, electricity price reform is the most critical question in electric power system reform. Electricity price reform makes the electricity sell prices fluctuating with the changes of demand and supply, so it is necessary to figure out the impact effect of the electricity price’s volatility on macro-economy in China.At first, we build a Dynamic Stochastic Equilibrium Models(DSGE) which contains electric power, this model can be used to simulate the economic environment in China, and it makes microeconomic sense. By setting up typical family, they maximize their own utility to weight the leisure and labor, and gain paid from the labor market, then the typical family buy electric power for themselves, or provide it to intermediate products manufacturers, labor, electric power and capital are the three principal factors of production in intermediate products manufacturers, the product are delivered to the final product manufacturers, the monetary authority adopt the extend Taylor rule to market regulation. Through market clearing, solving out the first-order conditions, calibration,Bayesian estimation and a series of processes, then we can simulate the impacts of output investment, and other macroeconomic variables from electricity price’s volatility, and through historical variance decomposition from first-quarter 2000 to fourth-quarter 2014,this paper test the explanations ability of electricity price impact on China’s economic fluctuations. And the last, according to the benchmark, we evaluate the theoretical model’s stability we built before.In consideration of the theoretical model cannot entirely fitting to the real economic environment, and can’t reflect the fast time-varying characteristic of economic environment,so traditional econometric model is necessary to empirical test. Therefore, this paper use the non-theoretical Time-Varying Parameters Factor-Augmented VAR model(TVP-FAVAR) to empirical test the theoretical model which this paper used before.Through 109 macro variables, we choice three explain factors, and together with other examine variables constructed TVP-FAVAR model.This paper investigate the impulse response of output, price level, investment and other variables from electricity price’s volatility at four points below: the second quarter of 2005,the third quarter of 2009, the first quarter of 2011, and the fourth quarter of 2014. This paper construct the results between DSGE model and TVP-FAVAR model, the study found that the volatility of electricity price has a great impact on China’s macroeconomic and this impact varies with time.Finally, according to this research conclusion and based on the present economic situation and the electric power market reform in China, in view of the possible problems in the process of electricity price reform, this paper make corresponding policy recommendations.