China’s Business Cycles: The International Dimension

This paper investigates the causes of China’s output and trade balance fluctuations in the period of 1985–2000, with special attention to the role of the real exchange rate. The effects of four types of shock – the foreign supply shock, the domestic supply shock, the relative demand shock and the nominal shock – are examined, employing a near -VAR that embodies the long-run properties of a ‘dependent economy’ model. Two findings emerge as important: First, domestic shocks are the main source of output fluctuations, indicating a lack of synchronization between China’s business cycles and those of its trading partners. Second, the trade balance is little affected by nominal shocks. Doubt is thus cast on the claim that monetary measures would suffice to redress China’s trade ‘imbalance’. JEL classification : O53; F40; F0