Reinterpretation of China's Economic Fluctuation: Concept, Characteristics and Connotation
We elaborate and distinguish some crucial concepts in the research of China's economic fluctuations. We emphasize that while shock is the source of economic fluctuations, wedge that distorts equilibrium conditions of the economy, is the mechanism through which the shock spreads. The two concepts are not equivalent, nor can they be separated. Having clarified the relevant concepts, we account for the characteristics and influencing factors of China's economic fluctuations from four perspectives: output, labor, investment and consumption. The results show that efficiency wedges and the corresponding shocks play major roles in explaining China's economic fluctuations; labor wedge is crucial for interpreting fluctuations in China's labor markets and the properties of China's economy after Covid-19; decline in investment is not caused by the deterioration of investment wedges, rather, it is highly correlated with economic fundamentals, but investment wedges do have important meaning in understanding China's 'low consumption' characteristics. Finally, we show that the contribution of different wedges to economic fluctuation is time-varying. The idea of using wedges in the corresponding market to generalize and measure frictions in reality is of great value in guiding how to introduce frictions into the structural model, and the relevant conclusions have inspiration for macroeconomic policies.
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