Author: Xinyu Ge, Xiao-Lin Li, Yong Li and Yan Liu

Abstract: We study the approximate sources of China's business cycles in an estimated dynamic stochastic general equilibrium (DSGE) model with housing and banking. The model replicates well the volatility and cyclicality of key macroeconomic variables observed in the past two decades in China. A host of shock decomposition exercises demonstrate that, among the shocks being considered, both financial and housing shocks are driving China's business cycles, accounting for a particularly large fraction of the variance in most macroeconomic and financial variables at the business cycle frequencies. In particular, the capital quality, housing demand, and loan-to-value shocks display prominent contributions to the business cycle fluctuations. Moreover, there exists substantial interactions between the banking and housing sectors in China, where the collateral constraint and the financial constraint amplify with each other. The results shed new light in the understanding of China's business cycles, a nd may serve as a useful benchmark for future quantitative analyses of China's macroeconomic fluctuations using DSGE frameworks.

This article was published online in China Economic Review, which is expected to be officially published in April 2022. The journal is a B+ journal of the School of Economics and Management.

Paper link address: https://doi.org/10.1016/j.chieco.2022.101753