Macroeconomic fluctuations in China : sources and its implications for Asean Countries

Abstract

The main objective of this dissertation is to investigate the source of macroeconomic fluctuations in China for the period 1978 to 2004 by (1) establishing the main feature of macroeconomic fluctuations; (2) identifying the sources of macroeconomic fluctuations and evaluating their impacts on Chinese domestic key variables using the structural vector autoregression (SVAR) model; and (3) investigating the business cycle dynamics between China and ASEAN core countries. The analysis shows that China's business cycle, except of some idiosyncrasies, is similar to those of other developed economies. The results from the stylized facts indicate that both demand and supply side shocks are important in generating the macroeconomic fluctuation in China. The SVAR analysis also reveals that both demand and supply shocks explain most of the fluctuations in Chinese output. Domestic supply shocks are the most important factor in explaining the fluctuations of Chinese output both in the long run and short run. Nominal shocks are the main sources of real effective exchange rate (REER) variation. Our results also show that domestic supply shocks are the leading causes of the price changes in the long-run. Domestic demand shocks are the single most important factor for the movement of real money balance. Our result also shows that the pattern of business cycle synchronization between China and ASEAN has substantially changed. There is strong evidence in favour of the existence of a common cycle for ASEAN countries. However, the long run relationship becomes stronger and the speed of adjustment becomes even faster across the ASEAN countries when China is included in the cycle. More interestingly, the speed of adjustment becomes even faster in the second sub-period when the full period is split into two sub-periods, which indicates a higher degree of economic integration between China and ASEAN countries. These findings are important in understanding the macroeconomic fluctuations in Chinese economy and most importantly they can be used in designing effective macroeconomic policies In China. The results are also important in designing any coordinating policy between China and ASEAN countries.