Technological progress, fiscal policy, and economic fluctuations in China: Evidence from the heterogeneous firm DSGE model during the COVID-19 pandemic

Abstract

Against the backdrop of the global COVID-19 pandemic and the deepening structural changes in the Chinese economy, this study presents a four-sector dual Dynamic Stochastic General Equilibrium (DSGE) model that incorporates households, heterogeneous firms, capitalists, and the government, taking into account the current domestic "dual economic structure." The model is used to simulate and analyze the impacts of fiscal policies and technological progress on diverse economic entities during the pandemic. The study reveals several key findings: (1) the pandemic outbreak has a significant short-term impact on the economy, disproportionately affecting small and microenterprises but with higher natural recovery rates compared with large and medium-sized enterprises; (2) unbiased fiscal policies have positive effects on output and capital, with larger output recovery effects observed for large and medium-sized enterprises, while capital recovery effects are less favorable; (3) technological progress contributes to rapid and stable economic growth, yielding overall benefits for large and medium-sized enterprises, but leading to significant crowding-out effects on small and microenterprises; and (4) solely increasing tax support for small and microenterprises, assuming constant tax revenue sources, does not enhance the overall resilience of the economy. These research findings provide policymakers with a dynamic microeconomic foundation within a macroeconomic framework, thereby enhancing the efficacy and precision of policies.