Understanding the Catalysts of China's Great Moderation During the Post-Crisis Era: An Industrial Structure Evolution Perspective

Abstract

Previous research has primarily examined the driving dynamics of the Great Moderation through the lens of stochastic shocks or monetary policy, overlooking the influence of industrial structure evolution. To bridge this gap, our study aims to investigate the driving dynamics of China's Great Moderation during 2012–2019 by adopting an industrial structure evolution perspective. To elucidate the underlying driving dynamics, the time-varying parameter structural vector autoregressive (TVP-SVAR) model with sign restrictions, along with impulse response analysis, forecast error variance decomposition, and Granger causality test were employed. The results indicate that China's Great Moderation during the post-crisis era is mainly due to the upgrade of industrial structure and supply-side structural reform. Moreover, our paper assesses whether regional differences might influence the aforementioned conclusions. We also investigate the driving dynamics of the Great Moderation in China and other emerging economies, such as Russia and Brazil, which share similar industrial structure evolution patterns. The results consistently highlight the crucial role played by industrial structure upgrade in the Great Moderation. Our work offers valuable theoretical and policy insights for macroeconomic stability in emerging economies.