Research

Working Papers


This paper explores the impact of fiscal policy on the economy through a dynamic stochastic general equilibrium (DSGE) model with financial frictions. Utilizing the Bayesian estimation methods, I analyze the dynamics of economic variables under four fiscal shocks: government spending shocks, government transfer shocks, individual income tax rates shocks, and consumption tax rates shocks. In addition, I conduct a counterfactual exercise by comparing the impulse response functions (IRFs) from the models with and without financial frictions, and I find that financial frictions amplify the effects of fiscal shocks on output and inflation. Finally, I utilize a structural vector autoregressive (SVAR) model to empirically investigate the impact of fiscal shocks. Consistent with the theoretical predictions, the results show that government spending has a greater stimulative effect than government transfer, and the increase in tax rates will decrease output and increase inflation. This study provides new insight into understanding the role of financial frictions in affecting the transmission mechanism of fiscal policy.

Monetary policy has been playing a critical role in China’s macroeconomic stabilization. This paper studies the effectiveness of China’s monetary policy in promoting output and stabilizing price levels by a New Keynesian dynamic stochastic general equilibrium (DSGE) model. Based on the model calibrated to Chinese data from 2000Q1 to 2019Q4, the simulated impulse response functions (IRFs) show that a one standard deviation monetary policy shock increases output for about six quarters, but it does not significantly increase inflation. This paper shows that monetary policy is likely to be one of the factors that account for the low inflation level in the past twenty years in China even after the 2008-09 Chinese economic stimulus plan.