Simulation Analysis of Macroeconomic Policy Orientations’ Effects on the Industrial Economy— Based on Dynamic CGE Model

Yuan Lei  and Wang Xiuli
Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing, China

Abstract:  There are three different orientations of the macroeconomic policies, namely, factor-expansion, prudent-continuation and structural-adjustment. The paper uses the dynamic CGE model to simulate the effects of the three different orientations on the economy, and arrives at the following conclusions: while the factor-expansion policies can lead to growth of economic output, they also result in the further imbalance in the industrial structure and the “crowding-out effect” on the private investment. In addition, such growth is unsustainable in the long run; the growth of the industrial economy will decline rapidly to a lower level after reaching a certain high level. The prudent-continuation policies refer to the continuation of the current policies that sustain the current trends of the industrial economy, and such policies reduce the growth of the industrial economy to a lower level in the long run. The structural-adjustment policies reduce the economic output at the current stage; however, it can bring a gradual improvement of industrial structure and a balance of the supply and demand. In the long run, the optimized structure will improve the total factor productivity (TFP) and the production-possibility frontier, and thereby realize a long-term steady and rapid growth of the industrial economy. Four policy recommendations are proposed based on the simulation of the models, including taking the structural adjustment as the fundamental orientation of macroeconomic policies, lowering the “floor level” of economic growth with macro regulation, giving play to the fundamental role of market mechanism in structural adjustment and increasing the role of TFP in the growth of the industrial economy.
Keywords: dynamic CGE model, factor-expansion policies, prudent-continuation policies, structural-adjustment policies

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