Can political signals explain business cycles in China? A simulation based on RBC model with news shock

This paper evaluates whether government-issued growth goals and pro-technology policies can work as effective news shocks in simulating business cycles in China. Based on an RBC model and the calibration of parameters, the results show that the proposed RBC model with both types of political signals can effectively simulate the business cycles of China’s economy. The two political signals have rich information about news shocks to households’ productivity expectations. This paper provides a novel approach to empirically identify news shocks based on political decisions related to economic growth and technology promotion, which can be adopted in regions without sufficient marketized productivity forecasts.