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

Abstract

AbstractThis paper studies empirically the role ofChina in the world economy. We examine both the way theChinese economy reacts to exchange rate shocks and the repercussions for the world economy of an output shock emanating fromChina. 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 toChinese output translates to a permanent increase of 1.1% inChinese realGDPand a 0.1% to 0.5% rise in output for most large economies. Second, to benchmark the shock toChinese output, we examine the response to a +1% shock toUS GDP. The results show that theUSeconomy 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 theUSshock. Finally, we are the first to assess the impact of a real appreciation of the renminbi versus theUSdollar in a global model. Our results indicate that real appreciation of the renminbi decreases the level ofChineseGDPslightly and the long‐run effect is also negative for many countries exporting (e.g. raw materials) toChina.