International Real Business Cycles of the Chinese Economy: Asymmetric Preference, Incomplete Financial Markets, and Terms of Trade Shocks

This article establishes a dynamic stochastic general equilibrium model of the Chinese open real economy, and aims to give a theoretical account of the empirical stylized facts of economic volatility. Specifically, we investigate two questions: first, what are the stylized facts of the Chinese open economy fluctuation? Is there anything particular that makes it different from other major economies? Second, could theoretical models reasonably explain and fit those facts well? To answer the first question, we use four different filters to extract volatility so as to contribute a robust summary of the stylized facts. As for the second question, we find that asymmetric preference, incomplete financial markets, and terms of trade shocks significantly improve the model’s prediction. Negative international co-movement of investment is the special feature of the Chinese economy, and our model caters for that well.