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China’s Business Cycles between 1954 – 2004: Productivity and Fiscal Policy Changes

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  • Hsu, Minchung
  • Zhao, Min

Abstract

We study the real business cycles in China between 1954-2006, and examine the changes after China’s market-oriented reforms starting in 1978. We overcome some data problems and find that the economic volatility is generally moderated after 1978. However, the relative volatility of each variable to output diverges. We undertake a neo-classical approach to investigate factors that can drive the features of long-term fluctuations and the differences between the pre-1978 and the post-1978 periods. We find that TFP process can explain the main features of fluctuations and the general moderation but not the relative volatility changes. We show that policy changes in government expenditure can account for the relative volatility divergency. Counterfactual experiments are also provided to discover the role of each factor in explaining the long-term fluctuation features in China.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21283.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:21283

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Keywords: business cycles; fiscal policy; market-oriented reforms; China;

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  1. Chow, G.C., 1990. "Capital Formation And Economic Growth In China," Papers, Princeton, Department of Economics - Econometric Research Program 356, Princeton, Department of Economics - Econometric Research Program.
  2. Horvath, Michal, 2009. "The effects of government spending shocks on consumption under optimal stabilization," European Economic Review, Elsevier, Elsevier, vol. 53(7), pages 815-829, October.
  3. Jordi Galí & J. David López Salido & Javier Vallés, 2003. "Understanding the effects of government spending on consumption," Banco de Espa�a Working Papers, Banco de Espa�a 0321, Banco de Espa�a.
  4. Sergio Rebelo, 2005. "Real Business Cycle Models: Past, Present and Future," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 522, University of Rochester - Center for Economic Research (RCER).
  5. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(8), pages 2543-2583, August.
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  7. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
  8. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  9. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  10. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  11. Keisuke Otsu, 2008. "A Neoclassical Analysis of The Korean Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 449-471, April.
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