Policy Shocks and Macroeconomic Fluctuations in a Two‐country Dynamic Stochastic General Equilibrium Model: Evidence from China*

Abstract

In this paper, we construct a two-country dynamic stochastic general equilibrium model to investigate the sources of business cycles in China and the contributions of policy shocks in economic fluctuations. The empirical results from Bayesian estimation show that, apart from the traditional supply and demand shocks, monetary and fiscal policy shocks also play important roles in determining China's economic fluctuations. In addition, we find significant feedback effects between monetary and fiscal policies in China, indicating that policy coordination is an important feature of China's monetary and fiscal policies. Overall, these results not only shed new light on the policy factors behind China's economic fluctuations, but also provide new evidence that is helpful for understanding the policy transmission mechanisms in China.

Assessing the Macroeconomic Consequences of External Financial Upheavals on China: A Caution of a Silicon Valley Bank’s Collapse

“…Guided by the studies of Yang et al [47] and He [48], we selected a discount factor of 0.99. The proportion of domestic goods in consumption, influenced by the research of Jin et al [49], Wang and Yao [50], and Ma [51], was established at a value of 0.5. The banker survival rate of 0.95 was derived in alignment with Song et al [52], Ge et al [53], and Ma and Lv [54].…”