Government intervention ability and business cycle co-movement:an empirical study based on China and its major trading partners

LIU Dexue1 CHEN Ding1

(1. EconomyDepartment, Jinan University)

【Abstract】Applying a simultaneous equations model, this paper empiricallyinvestigates the effect and the influencing pathway ofgovernment intervention ability on business cycle co-movement by using paneldata of China and itsmajor trade partners from 1997 to 2011. The results indicate that thedifference in government intervention ability influence bilateral businesscycle co-movement significantly through direct and indirect (internationalconduction channels) ways. The effectsof both ways are negative, but the degrees of influence differ remarkably. The endogenousrelations among complementary/alternative trade, vertical/horizontal investmentand industrial structure as well as the inconsistent influence of the difference ingovernment intervention ability on different conduction channels interms of both direction and degree make the indirect mechanism quite complex,contributing to a final negative effect resulting from the combined result ofthe negative effect of trade and industry structure and the positive influenceof investment. The influence of government interventionability on the conduction channels is not consistent with their influence on the businesscycle co-movement through different channels, concludingthat “more powerful inintervention ability equating to more efficient” might be a misconception.

【Keywords】 difference in government intervention ability; business cycle co-movement; conduction channels; simultaneous equations model;


【Funds】 National Social Science Key Fund Program “Development Trendof Global Division of Labor in Post-Crisis Era and Its influence on China’seconomic development” (09AZD015) the 12th Five-yearPlan Philosophy and Social Science Program of Guangdong Province “A Research inLabor Division and Coordinate Development Model in Pearl River Delta”(GD13CYJ09)

Download this article

(Translated by Zhou Ye)


    Cheng, H. & Ceng, L. EconomicResearch Journal (经济研究), (9) (2010).

    Xiao, W. & Liu, D. Journal of International Trade (国际贸易问题),(3) (2013).

    Yuan,Q. et al. World Economy Studies (世界经济研究), (11) (2011).

    Cerqueira,P.A.,Martins,R.,(2011)“Is There a Political Dimension on Business Cycle Synchronization?”International Review for Social Sciences 64(3),329-341.

    Fidrmuc,J.,Ikeda,T.,Iwatsubo,K.,(2012)“International Transmission of Business Cycles:Evidence from Dynamic Correlations,”Economics Letters 114(3),252-255.

    Goh,S.K.,Wong,K.N.,Tham,S.Y.,(2013)“Trade Linkages of Inward and Outward FDI:Evidence from Malaysia,”Economic Modeling 35(9),224-230.

    Hsu,C.C.,Wu,J.Y.,Yau,R.,(2011)“Foreign Direct Investment and Business Cycle Comovements:The Panel Data Evidence,”Journal of Macroeconomics 33,770-783.

    Markus,B.,Mark,G.,(2013)“Exogenous Volatility and the Size of Government in Developing Countries,”Journal of Development Economics 105,254-266.

    Ng,E.C.Y.,(2010)“Production Fragmentation and Business-cycle Comovement,”Journal of International Economics 82(1),1-14.

    Teles,V.K.,Mussolini,C.C.,(2014)“Public Debt and the Limits of Fiscal Policy to Increase Economic Growth,”European Economic Review 66,1-15.

This Article


CN: 11-1692/F

Vol , No. 05, Pages 31-40

May 2015


Article Outline


  • 1 Introduction
  • 2 Studydesign
  • 3 Analysis of estimation results
  • 4 Conclusion and Suggestions
  • References