SOE and Chinese Real Business Cycle

63 Pages Posted: 6 Feb 2016 Last revised: 5 Aug 2022

Date Written: February 5, 2016

Abstract

This working paper was written by Daoju Peng (Capital University of Economics and Business), Kang Shi (Chinese University of Hong Kong) and Juanyi Xu (Hong Kong University of Science and Technology).

Chinese real business cycle (RBC) exhibits a unique pattern, which is characterized by moderate consumption volatility, substantially low 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 facts 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. Relatively speaking, 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

JEL Classification: E3, F3, F4

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, SOE and Chinese Real Business Cycle (February 5, 2016). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 02/2016, Available at SSRN: https://ssrn.com/abstract=2728171 or http://dx.doi.org/10.2139/ssrn.2728171

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