Investment Shocks and China's Economic Fluctuations

This paper investigated the source of China's economic fluctuations and the dynamic transmission mechanism of investment shocks with a new Keynesian dynamic stochastic general equilibrium model. Based on 1995Q1-2010Q3 Quarterly data, the empirical analysis was conducted by Bayesian method. The results showed that the volatility and persistence of investment shocks are obvious. Investment shocks are the main source of economic fluctuations. The positive investment shocks because pro-cyclical movements in key macroeconomic variables such as output, consumption, wage and countercyclical fluctuations in inflation. In addition, technology shocks are also an important source of economic fluctuations, but its effect is relatively limited. The current demand management policy may contribute to achieve macroeconomic stability.