Abstract This paper constructs a high-dimensional Bayesian vector autoregressive (BVAR) model and uses a factor-structured sign restriction approach to identify seven major economic shocks, including domestic demand shocks, domestic supply shocks, foreign demand shocks, foreign supply shocks, financial shocks, fiscal policy shocks, and monetary policy shocks. The paper analyzes the intrinsic characteristics, impact scope, and contributions of these shocks to China's economic cycle fluctuations. The findings are as follows: First, domestic demand and supply shocks have direct impacts on GDP and CPI, while foreign demand shocks primarily affect the Chinese economy through trade channels. The effect of foreign supply shocks on the Chinese economy is minimal, whereas fiscal and monetary policy shocks have more significant effects. Second, financial shocks, particularly real estate price shocks, have the largest impact on variables such as GDP, consumption, and investment, making them the main source of China's economic cycle fluctuations. However, domestic supply and demand shocks also make important contributions. Third, from 2010 to 2019, the moderation of China's economic cycle fluctuations is closely related to the weakening of both internal and external economic shocks. Fourth, the effects of fiscal and monetary policies on output exhibit time-varying characteristics, with both policies effectively stabilizing economic growth in response to significant negative shocks. This study provides a new perspective on understanding the complexity of China's economic cycle fluctuations and their dominant drivers, offers a novel explanation for the phenomenon of “great moderation” in China's economy, and emphasizes the importance of fiscal and monetary policies in smoothing economic volatility.
Liu et al. (Sun,) studied this question.