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The rise of China and its implications for emerging markets - Evidence from a GVAR model

  • Feldkircher, Martin

    ()

    (BOFIT)

  • Korhonen, Iikka

    ()

    (BOFIT)

This paper studies empirically the role of China in the world economy. We examine both the way the Chinese economy reacts to selected exogenous macroeconomic shocks and the repercussions for the world economy of a shock emanating from China. With regard to the latter, we focus on the responses of emerging markets, in particular those in Europe. Based on a global VAR (GVAR) 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 1.2% in Chinese real GDP and a 0.1% to 0.5% rise in output for most large economies. The countries of Central Eastern Europe (CEE) and the former Commonwealth of Independent States (CIS) also experience an output rise of 0.2%, while countries in South-Eastern Europe see a permanent 0.1% reduction in output. Secondly, 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 despite the rapid rise of China in recent years. In this vein, output rises in advanced economies by 1% to 1.4% and in the CIS and CEE regions by 1.5% and 0.7% respectively. By contrast China seems to be little affected by the US shock. Finally, we examine the effect of a +50% hike in oil prices on China and emerging economies. As one of the largest oil exporters, Russia’s real output increases by about 6%. In contrast, the surge in oil prices puts a drag on Chinese output, amounting to 4.5% in the long-run.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/2012/dp2012.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 20/2012.

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Length: 39 pages
Date of creation: 24 Sep 2012
Date of revision:
Handle: RePEc:hhs:bofitp:2012_020
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Web page: http://www.suomenpankki.fi/bofit_en/
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  1. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199296859, March.
  2. Weiqi Tang & Libo Wu & ZhongXiang Zhang, 2009. "Oil Price Shocks and Their Short- and Long-Term Effects on the Chinese Economy," Economics Study Area Working Papers 102, East-West Center, Economics Study Area.
  3. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  4. Silvia Sgherri & Alessandro Galesi, 2009. "Regional Financial Spillovers Across Europe; A Global VAR Analysis," IMF Working Papers 09/23, International Monetary Fund.
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  6. Zhaoyong Zhang & Kiyotaka Sato, 2012. "Should Chinese Renminbi be Blamed for Its Trade Surplus? A Structural VAR Approach," The World Economy, Wiley Blackwell, vol. 35(5), pages 632-650, 05.
  7. Jarko Fidrmuc & Iikka Korhonen & Ivana Bátorová, 2013. "China in the World Economy: Dynamic Correlation Analysis of Business Cycles," CESifo Economic Studies, CESifo, vol. 59(2), pages 392-411, June.
  8. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
  9. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci & TengTeng Xu, 2012. "China’s Emergence in the World Economy and Business Cycles in Latin America," Working Papers 12-32, Bank of Canada.
  10. Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned - Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland, Institute for Economies in Transition.
  11. M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2007. "What if the UK or Sweden had joined the euro in 1999? An empirical evaluation using a Global VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 55-87.
  12. Korhonen, Iikka & Ledyaeva, Svetlana, 2010. "Trade linkages and macroeconomic effects of the price of oil," Energy Economics, Elsevier, vol. 32(4), pages 848-856, July.
  13. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, XingWang, 2012. "Are Chinese trade flows different?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2127-2146.
  14. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," CESifo Working Paper Series 1918, CESifo Group Munich.
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