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Frontiers of Economics in China

Front Econ Chin    2010, Vol. 5 Issue (3) : 464-488     https://doi.org/10.1007/s11459-010-0108-y
research-article
Assessing the Role of Aggregate Demand and Supply Shocks in China’s Macroeconomic Fluctuation
Min Gong(), Wenpu Li()
Center for Macroeconomic Research, Xiamen University, Xiamen 361005, China
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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     
Corresponding Author(s): Min Gong,Email:mgong@xmu.edu.cn; Wenpu Li,Email:wpli@xmu.edu.cn   
Issue Date: 05 September 2010
 Cite this article:   
Min Gong,Wenpu Li. Assessing the Role of Aggregate Demand and Supply Shocks in China’s Macroeconomic Fluctuation[J]. Front Econ Chin, 2010, 5(3): 464-488.
 URL:  
http://journal.hep.com.cn/fec/EN/10.1007/s11459-010-0108-y
http://journal.hep.com.cn/fec/EN/Y2010/V5/I3/464
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