Business Cycles in an Estimated DSGE Model of China

Abstract

A small-scale New-Keynesian dynamic stochastic general equilibrium model is estimated by maximum likelihood method using quarterly data of China. Model specifications and parameter equalities between various competing model variants are addressed by formal statistical hypothesis tests, while implications for business cycle fluctuations are evaluated via a variance decomposition experiment, second-moments matching, and some out-of-sample forecast exercises. It is highlighted that both forward and backward components are important for the dynamics of output, inflation and real balances. The monetary authority will take a sufficient aggressive stance, with a significant lagged response, to the current inflation pressure, while leaving less attention to changes in aggregate output. Variance decomposition reveals that large percentages of variations in real and nominal variables are explained by the highly volatile preference shock and potential output shock, respectively. When nominal and real frictions as well as additional shocks are included, our estimated model overall can successfully reproduce the stylized facts of business cycles in the actual data of China and even frequently outperform those forecasts from an unconstrained VAR.

The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model

“…Second, regarding the NK-DSGE model, there are various papers estimating this model for policy analysis in the developing and emerging economies [Liu and Zhang (2010), Gu et al (2014) and Dai et al (2015) for China; Elekdag et al (2005) and Choi and Hur (2015) for Korea; Sahminan et al (2017) and Gu et al (2014) for Indonesia; Ramayandi (2011) for four ASEAN countries such as Malaysia, Thailand, Indonesia and Philippines; Saxegaard et al (2010) and Gabriel et al (2016) for India; Silveira (2008) and Palma and Portugal (2014) for Brazil, Castillo et al (2013) for Peru, Medina and Soto (2007) for Chile and Steinbach et al (2009) for South Africa].…”

A model of the Euro area, China, and the United States: Trade links and trade wars

“…Kim and Chen (2019) discuss the use of various monetary policy tools in China and show that recent monetary policy there can be viewed as an interest-based framework. Gu et al (2014), Dai et al (2015) and Li and Liu (2017) estimate a DSGE model of the Chinese economy. We use the estimates from these papers as inspiration for our parameter priors and for the structure of the Chinese block.…”