Working Paper: CEPR ID: DP9422
Authors: Vo Phuong Mai Le; Kent Matthews; David Meenagh; Patrick Minford; Zhiguo Xiao
Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.
Keywords: China; Crises; DSGE Model; Financial Frictions; Indirect Inference
JEL Codes: C1; E3; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international shocks (F69) | Chinese economy performance (P17) |
| domestic banking shocks (F65) | Chinese economy performance (P17) |
| state banking system and government spending (E58) | counteract demand shocks (E39) |
| government expenditure feedback (H59) | likelihood of business cycle crisis (E32) |
| government expenditure feedback (H59) | excess capacity and instability in output (E22) |
| financial shocks (F65) | fluctuations in the economy (E32) |
| external demand shocks and commodity price fluctuations (F41) | crisis (H12) |