The Rise of China and Its Implications for the Global Economy: Evidence from a Global Vector Autoregressive Model

This paper studies empirically the role of China in the world economy. We examine both the way the Chinese economy reacts to exchange rate shocks and the repercussions for the world economy of an output shock emanating from China. Based on a global vector autoregressive model and a new data set that excels in country coverage and covers the most recent time period including the global financial crisis, our results are threefold: First, we show that a +1% shock to Chinese output translates to a permanent increase of 1.1% in Chinese real GDP and a 0.1% to 0.5% rise in output for most large economies. Second, to benchmark the shock to Chinese output, we examine the response to a +1% shock to US GDP. The results show that the US economy remains dominant in the world economy, as output rises in other advanced economies by 0.6 to 1%. By contrast, China seems to be little affected by the US shock. Finally, we are the first to assess the impact of a real appreciation of the renminbi versus the US dollar in a global model. Our results indicate that real appreciation of the renminbi decreases the level of Chinese GDP slightly and the long-run effect is also negative for many countries exporting (e.g. raw materials) to China.