The Rise of China and Its Implications for the Global Economy: Evidence from a Global Vector Autoregressive Model

• Published date: 01 February 2014
• Date: 01 February 2014
• Author: Martin Feldkircher,Iikka Korhonen
• DOI: http://doi.org/10.1111/1468-0106.12052

THE RISE OF CHINA AND ITS IMPLICATIONS FOR THE

GLOBAL ECONOMY: EVIDENCE FROM A GLOBAL

VECTOR AUTOREGRESSIVE MODEL

MARTIN FELDKIRCHER Oesterreichische Nationalbank (OeNB)

IIKKA KORHONEN*Bank of Finland Institute for Economies in Transition

(BOFIT)

Abstract. This paper studies empirically the role of China in the world economy. We examine both

the way the Chinese economy reacts to exchange rate shocks and the repercussions for the world

economy of an output shock emanating from China. Based on a global vector autoregressive model

and a new data set that excels in country coverage and covers the most recent time period including

the global f‌inancial crisis, our results are threefold: First, we show that a +1% shock to Chinese

output translates to a permanent increase of 1.1% in Chinese real GDP and a 0.1% to 0.5% rise in

output for most large economies. Second, to benchmark the shock to Chinese output, we examine

the response to a +1% shock to US GDP. The results show that the US economy remains dominant

in the world economy, as output rises in other advanced economies by 0.6 to 1%. By contrast, China

seems to be little affected by the US shock. Finally, we are the f‌irst to assess the impact of a real

appreciation of the renminbi versus the US dollar in a global model. Our results indicate that real

appreciation of the renminbi decreases the level of Chinese GDP slightly and the long-run effect is

also negative for many countries exporting (e.g. raw materials) to China.

1. INTRODUCTION: THE RISE OF CHINA AND ITS ROLE IN THE

GLOBAL ECONOMY

China’s economic growth since the 1980s has been enormous. The Chinese

growth miracle has been fueled by buoyant investments coupled with strong

growth in exports. Even during the global f‌inancial crisis, with the global

economy sliding into recession and global trade collapsing, the Chinese economy

was able to post healthy growth rates. Many other emerging markets have also

grown rapidly over the past two decades, which has shifted the balance of power

in the global economy towards middle-income countries and away from high-

income OECD countries. This change in the composition of global output and

trade makes the analysis of the larger emerging markets, and especially China,

even more important than before. Our contribution concerns the role of China in

the global economy, both concerning its output and exchange rate.

The rise of the Chinese economy has been accompanied by a steady increase in

its trade integration with the world economy. Figure 1 depicts the share of trade

*Address for Correspondence: Bank of Finland Institute for Economies in Transition, Bank of

Finland, PO Box 160, Helsinki 00101, Finland. E-mail: iikka.korhonen@bof.f‌i. The opinions in this

paper are those of the authors and do not necessarily represent those of the Oesterreichische

Nationalbank or Bank of Finland. We acknowledge excellent data support from Zoltan Walko. We

would like to thank Rainer Puhr, Georgios Georgiadis and Xu Han as well as participants in

seminars at the Central Bank of Russia, the Bank of Finland, Hitotsubashi University, Japan, the

Conference on Renminbi Internationalization at the City University of Hong Kong, and the 4th

Workshop on Money, Macro and Finance in East Asia in Eltville, Germany for discussion and

comments on the paper. Any errors or omissions are naturally our own.

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Pacif‌ic Economic Review, 19: 1 (2014) pp. 61–89

doi: 10.1111/1468-0106.12052

© 2014 Wiley Publishing Asia Pty Ltd

510152025

In %

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JP

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In %

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Figure 1. Shares of China in countries’ total trade, %

Source: Authors’ calculations.

M. FELDKIRCHER AND I. KORHONEN

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© 2014 Wiley Publishing Asia Pty Ltd