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Institute for Economies in Transition, Bank of Finland BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland

No 5/2011:
Changing economic structures and impacts of shocks — evidence from a DSGE model for China

Aaron Mehrotra (), Riikka Nuutilainen () and Jenni Pääkkönen

Abstract: We construct a small-scale dynamic stochastic general equilibrium (DSGE) model that features price rigidities, habit formation in consumption and costs in capital adjustment, and calibrate the model with data for the Chinese economy. Our interest centers on the impact of technology and monetary policy shocks for different structures of the Chinese economy. In particular, we evaluate how a rebalancing of the economy from investment-led to consumption-led growth would affect the economic dynamics after a shock occurs. Our findings suggest that a rebalancing would reduce the volatility of the real economy in the event of a technology shock, which provides support for policies aiming to increase the consumption share in China.

Keywords: DSGE; rebalancing; monetary policy shocks; technology shocks; China; (follow links to similar papers)

JEL-Codes: E52; E60; (follow links to similar papers)

27 pages, April 28, 2011

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