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Economic fluctuations, volatility changes and the role of government spending in China: A structural analysis

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  • Minchung Hsu
  • Junsang Lee
  • Min Zhao

Abstract

We study the economic fluctuations in China by using a standard neoclassical general equilibrium model to provide a structural analysis. We have carefully constructed measurements for economic variables from Chinese data to be consistent with the literature. We show that the government spending behaviour plays an important role in accounting for the changes in the pattern of both absolute and relative volatilities. Although we find that a general moderation in economic fluctuations after 1978 can be largely explained by the total factor productivity (TFP) process, TFP itself cannot explain the change in the pattern of relative volatilities. We show that policy changes in government spending can account for the relative volatility divergency. Counterfactual experiments are also provided to discover the role of each factor in explaining the economic fluctuations in China.

Suggested Citation

  • Minchung Hsu & Junsang Lee & Min Zhao, 2020. "Economic fluctuations, volatility changes and the role of government spending in China: A structural analysis," Pacific Economic Review, Wiley Blackwell, vol. 25(4), pages 512-538, October.
    • Handle: RePEc:bla:pacecr:v:25:y:2020:i:4:p:512-538
    DOI: 10.1111/1468-0106.12302
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    References listed on IDEAS

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    2. Tang, Le, 2022. "The dynamic demand for capital and labor: Evidence from Chinese industrial firms," Economic Modelling, Elsevier, vol. 107(C).

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