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The B.E. Journal of Macroeconomics

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Is risk shock a key factor driving business cycles in China?

Zhe Li
  • Corresponding author
  • School of Economics and Key Laboratory of Mathematical Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China
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/ Shuixing Luo
Published Online: 2017-09-29 | DOI: https://doi.org/10.1515/bejm-2017-0010

Abstract

This paper studies the impact of risk shock on the Chinese economy using a New-Keynesian model with financial frictions. The study shows that risk shock is an important driving force for the fluctuations of GDP, investment, capital, credit, and credit spread in China. However, the role of risk shock in driving China’s business cycles is not as crucial as in the US economy (see Christiano, Motto, and Rostagno 2014). There are three main reasons that explain the different performance of risk shocks in China and the US: the volatility of risk shock, the effect of equity shock, and the influence of macroeconomic policies are all different in China and in the US. Our paper contributes to an understanding of the business cycles in China during the period from 1999 to 2015, particularly in comparison with business cycles in the US.

Keywords: financial frictions; New Keynesian; risk shocks

JEL Classification: E44

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About the article

Published Online: 2017-09-29


Citation Information: The B.E. Journal of Macroeconomics, 20170010, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0010.

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