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

This paper studies empirically the role of C hina in the world economy. We examine both the way the C hinese economy reacts to exchange rate shocks and the repercussions for the world economy of an output shock emanating from C hina. 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 C hinese output translates to a permanent increase of 1.1% in C hinese real GDP and a 0.1% to 0.5% rise in output for most large economies. Second, to benchmark the shock to C hinese 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, C hina 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 C hinese GDP slightly and the long‐run effect is also negative for many countries exporting (e.g. raw materials) to C hina.