Abstract: External demand is crucial to a country’s economic growth. This is especially true at a time when China is comprehensively advancing high-standard opening-up, which makes it all the more necessary to study how macroeconomic policies can effectively mitigate the adverse effects of external demand shocks. By constructing a two-sector open-economy dynamic stochastic general equilibrium model, the effects of negative external demand shocks on the macroeconomy are analyzed, and on this basis the short-run and long-run effectiveness of fiscal policy as well as its welfare effects are further examined. The results show that, first, in the short run, a contraction in external demand exerts negative shocks on major economic variables such as employment, output, interest rates, and inflation, after which the economy gradually returns to its steady state. Meanwhile, consumption subsidies, tax cuts in the tradable sector, and tax cuts in the non-tradable sector can all effectively promote overall economic growth in the short run. Second, in the long run, fiscal policies can all effectively increase key macroeconomic variables: consumption subsidies are more effective in boosting employment, tax cuts in the non-tradable sector are more suitable for stimulating consumption, and tax cuts in the tradable sector can effectively raise aggregate output. Third, in the short run, consumption subsidies, tradable-sector tax cuts, and non-tradable-sector tax cuts all increase social welfare. Therefore, the key to comprehensively deepening fiscal reform lies in building a fiscal policy toolbox that combines short- and long-term measures and delivers precisely targeted interventions. Through cross-cycle and structure-optimizing policy design, this approach aims to achieve the strategic objectives of promoting development through reform and advancing opening-up through reform.

Key words: external demand shock, open economy, dynamic stochastic general equilibrium