A Multi-Country NOEM Analysis of China with Cross-Country Heterogeneity

Abstract

This thesis develops a multi-country model for China based on the New Open Economy Macroeconomics to study China's interactions with the United States, the Euro Area and the rest of the world. The model is estimated to identify heterogeneous structural characteristics of these economies using the Bayesian approach. Then the estimated model is simulated to find the international transmission of productivity improvements originated in each area. In particular, the model is applied to the modelling of heterogeneous external asset and liability positions and to analysis of the influences of international investment on the spillover effects of the shocks. Our model provides a comprehensive framework with heterogeneous structural features for open economy analysis between multiple countries, while the scale of the model is moderate and the identification is robust. In addition, our work broadens the family of general equilibrium models designed for the Chinese economy.

Our estimation finds large heterogeneity of structural parameter values and policy functions between these economies. China and the US have more distorted consumption patterns than other areas, and the production of the Euro Area is more vulnerable to shocks. The monetary policy of China can be described by both interest rate and money quantity rules with different targets, while other economies generally follow interest rate rules. Simulations show that productivity improvements from the US and the EA have larger spillover effects than the improvements originated in China. The US can promote trade surplus by stimulating growth. For China, productivity increase cannot easily build up her international investment position further, due to the adjustment costs induced by her large net position. The valuation effects are significant under large gross positions. Such effects are caused by interest rate differentials more than by exchange rate movements.