The Impact of Structural Shocks on China's Economy: Also on the Economic Impact of the COVID-19 Epidemic

Abstract

Abstract: The impact of infectious diseases as a short-term and severe structural shock on China's economy and policy choices has attracted widespread attention because of the global outbreak of COVID-19. This paper is a study based on the dynamic stochastic general equilibrium model that includes the upstream and downstream production structures, the different types of enterprises and the heterogeneous financial frictions. The findings show that the impact of the epidemic is a comprehensive impact on both productivity and demand at the same time, this feature is very important for evaluating its economic effect, and it can explain the stylized fact that the extent of China's consumption has declined more than that of production investment and that the recovery is rather slower since the outbreak of the epidemic. The effect of the structural tax reduction policy on economic stability is significantly better than that of the loose monetary policy, and the welfare loss is smaller, but the combination of the two policies can bring better welfare results. This is because monetary expansion stabilizes the aggregate demand while worsening the mismatch of credit resources at the same time, however, the structural tax reduction can partially correct the credit mismatch, and the use of the policy combinations can give full play to the advantages of the two policies.

Key words: structural shock, monetary policy, structural tax reduction, welfare analysis

WU Liyuan, LIU Yanzhao. The Impact of Structural Shocks on China's Economy: Also on the Economic Impact of the COVID-19 Epidemic[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2022, 0(1): 3-17.

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