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An Estimated DSGE Model for Business Cycle Analysis in China

Author

Listed:
  • Biao Gu

    (School of Economics, Shanghai University, Shanghai 200444, China)

  • Jianfeng Wang

    (Research Center of Applied Finance, University of International Business and Economics, Beijing 100029, China)

  • Jingfei Wu

    (School of Economics, Shanghai University, Shanghai 200444, China)

Abstract

A small-scale, but highly-stylized dynamic stochastic general equilibrium model is estimated by the maximum likelihood method using Chinese quarterly data. Model specifications and parameter equalities between various competing model variants are addressed by formal statistical hypothesis tests, while implications for business cycle fluctuations are evaluated via a variance decomposition experiment, second-moments matching, and some out-of-sample forecast exercises. It is highlighted that the monetary authority takes an aggressive stance to the current inflation pressure (there is a significant lagged response), while leaving less attention to changes in aggregate output. Variance decomposition reveals that large percentages of variations in real and nominal variables are explained by the highly volatile preference and potential output shock, respectively. When nominal and real frictions as well as additional shocks are included, overall our estimated model can successfully reproduce the stylized facts from actual data of Chinese business cycles and frequently can even outperform those forecasts from an unconstrained VAR.

Suggested Citation

  • Biao Gu & Jianfeng Wang & Jingfei Wu, 2013. "An Estimated DSGE Model for Business Cycle Analysis in China," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 8(3), pages 390-429, September.
    • Handle: RePEc:fec:journl:v:8:y:2013:i:3:p:390-429
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-002-013-0020-0
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    More about this item

    Keywords

    business cycle analysis; Chinese economy; DSGE model; interest rate rule;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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