Regimes Switching in China's Business Cycle and Analysis of the Properties of Regimes.

With a decrease of volatility in China's business cycles, stability in price is increased. This indicates a trade -- off and influence relationship between output and inflation in both the levels and the volatilities. In this paper, we are using the Vector Error Correct Model with Markov Regime Switching to test the equilibrium relationships in the long run and the short fluctuation patterns in the short run in the real output and inflation. Our aims are to test the relationships between growth and inflation in different regimes. We also want to test whether the relationship depends on the stages of business cycle. We find the following empirical evidences and economic policy implications: Firstly, by measuring and testing the regimes of growth, we find the evidence of the existence of boundary of growth. The growth process can be divided into two regimes titled by "suitable growth" and " fast growth" with the mean growth of 9.71% and 17.77% respectively. China's growth is frequently approaching the regime of "suitable growth". At the same time, the regime of "suitable growth" has both a stronger stability and a longer duration. This is the result of growth approaching natural rate. Secondly, by estimating the transition probabilities and the durations of regimes, we find the evidence supporting the existence of business cycle asymmetry in China's business cycles. In the point of duration, "suitable growth" is two times as long as the duration of "fast growth". In the point of transition possibility, the probability transited from "suitable growth" to "fast growth" is 7. 86%, and the inversed transition probability is 17.04%. This means that the economic growth is more likely to go slowly than fast. In the point of volatility, the standard deviations of "suitable growth" and "fast growth" are 1.95% and 3.67%. This means that the regime of "suitable growth" is a stable state compared with the regime of "fast growth". Thirdly, by measuring and testing the relationship between growth and inflation both in level and volatility, we find the evidences which show the threshold effect and spillover effect from inflation to growth. If inflation exceeds 10% , it will hurt the growth. If the inflation uncertainty is enlarged, output volatility will be increased in the following periods. As the Phillips Curve depends on the regimes of business cycles, we should choose the monetary target and tools according to the stages of growth. China's growth is at the regime of "suitable growth". In macroeconomic control, we should take a healty monetary policy to prevent the appearance of higher inflation and to avoid the return of deflation at the same time. [ABSTRACT FROM AUTHOR]