Assessing the Role of Aggregate Demand and Supply Shocks in China’s Macroeconomic Fluctuation

Min Gong () and Wenpu Li ()
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Min Gong: Center for Macroeconomic Research, Xiamen University, Xiamen 361005, China
Wenpu Li: Center for Macroeconomic Research, Xiamen University, Xiamen 361005, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2010, vol. 5, issue 3, 464-488

Abstract: The combination of a high growth rate and low information has been observed since the late 1990s in the Chinese economy. Should the fact be considered as a result of greatly improved supply capability or should the fact reflect the improvement in the government’s aggregate demand management? In this paper, we try to assess the role of aggregate demand and supply shocks in China’s macroeconomic fluctuation. We use a bivariate structural VAR model to investigate macroeconomic dynamics for China within the aggregate-demand and aggregate-supply framework, using the quarterly data in the period of 1996Q1–2005Q4. Our principal findings are following: (1) China’s high growth shall be associated more with greatly improved supply capability, especially after its WTO entrance. The expansionary aggregate demand policies may have limited effects to raise the growth rate in the post-1996 in China. This result suggests that we need a more pro-growth policy stance in order to maintain a high and stable growth. (2) The low inflation in that period is driven primarily by weak aggregate demand rather than supply factors.

Keywords: macroeconomic fluctuation; structural VAR; supply and demand shocks; China (search for similar items in EconPapers)
JEL-codes: C32 E3 O53 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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