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The Rise of China and Its Implications for the Global Economy: Evidence from a Global Vector Autoregressive Model

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  • Martin Feldkircher
  • Iikka Korhonen

Abstract

This paper studies empirically the role of China in the world economy. We examine both the way the Chinese economy reacts to exchange rate shocks and the repercussions for the world economy of an output shock emanating from China. Based on a global vector autoregressive model and a new data set that excels in country coverage and covers the most recent time period including the global financial crisis, our results are threefold: First, we show that a +1% shock to Chinese output translates to a permanent increase of 1.1% in Chinese real GDP and a 0.1% to 0.5% rise in output for most large economies. Second, to benchmark the shock to Chinese output, we examine the response to a +1% shock to US GDP. The results show that the US economy remains dominant in the world economy, as output rises in other advanced economies by 0.6 to 1%. By contrast, China seems to be little affected by the US shock. Finally, we are the first to assess the impact of a real appreciation of the renminbi versus the US dollar in a global model. Our results indicate that real appreciation of the renminbi decreases the level of Chinese GDP slightly and the long-run effect is also negative for many countries exporting (e.g. raw materials) to China.

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  • Martin Feldkircher & Iikka Korhonen, 2014. "The Rise of China and Its Implications for the Global Economy: Evidence from a Global Vector Autoregressive Model," Pacific Economic Review, Wiley Blackwell, vol. 19(1), pages 61-89, February.
  • Handle: RePEc:bla:pacecr:v:19:y:2014:i:1:p:61-89
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    1. repec:eee:ecmode:v:72:y:2018:i:c:p:78-98 is not listed on IDEAS
    2. Larry D. Qiu & Chaoqun Zhan, 2016. "Special Section: China's Growing Trade and its Role to the World Economy," Pacific Economic Review, Wiley Blackwell, vol. 21(1), pages 45-71, February.
    3. Xue, Huidan & Li, Chenguang & Wang, Liming, 2018. "The Global Vector Error Correction Model application on the dynamics and drivers of the World Butter Export Prices: Evidence from the U.S., the EU, and New Zealand," 2018 Annual Meeting, August 5-7, Washington, D.C. 273971, Agricultural and Applied Economics Association.
    4. Rudkin, Simon & Wong, Sen Min, 2015. "South East Asian Financial Linkages and the Changing Role of China: Insights from a Global VAR," MPRA Paper 65001, University Library of Munich, Germany.
    5. Anna Sznajderska, 2017. "The role of China in the world economy: evidence from global VAR model," NBP Working Papers 270, Narodowy Bank Polski, Economic Research Department.
    6. Dieppe, Alistair & Georgiadis, Georgios & Ricci, Martino & Van Robays, Ine & van Roye, Björn, 2017. "ECB-Global: introducing ECB's global macroeconomic model for spillover analysis," Working Paper Series 2045, European Central Bank.

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