SOE and Chinese Real Business Cycle

Daoju Peng, Kang Shi, Juanyi Xu and Yue Zhou ()
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Daoju Peng: Capital University of Economics and Business
Kang Shi: Chinese University of Hong Kong
Juanyi Xu: Hong Kong University of Science and Technology
Yue Zhou: Central South University

Annals of Economics and Finance, 2020, vol. 21, issue 2, 415-469

Abstract: Chinese real business cycle (RBC) exhibits a unique pattern, which is characterized by moderate consumption volatility, substantially lower investment volatility, and acyclical trade balance. These features are quite different from business cycles in other emerging markets and cannot be explained by existing emerging market RBC theories. Motivated by the fact that China undertook dramatic and persistent reform on state-owned enterprises (SOE) in the last 30 years, we construct a full-fledged general equilibrium model with SOE sector and show that the model does a fairly good job in accounting for the above features. The two main driving forces are: (1) shock to the share of downstream SOE in manufacturing sectors and (2) shock to upstream SOE's monopolistic position. These two shocks can explain 85 percent of output volatility, 79 percent of consumption volatility, 72 percent of investment volatility, and 57 percent of the volatility of trade balance-to-output ratio. Standard shocks such as permanent productivity shock, credit shocks, country risk premium shocks, and preference shocks are less important in explaining Chinese economic fluctuations. Our results show that Chinese RBC may be affected substantially by domestic policies.

Keywords: State-owned Enterprise; Real business cycle; Vertical structure; Financial friction; Permanent shocks; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E3 F3 F4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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