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We set up two rival Computable General Equilibrium (CGE) models of world trade, one based on classical theories of comparative advantage, the other based on recent gravity theories. We have tested them by indirect inference on the time-series of trade facts for five major countries or country blocs: the UK, the US, China and the EU. The UK is a small enough economy for the rest of the world's behaviour to be treated as exogenous, so we test the UK model with this held constant; the other countries/blocs are large so we test their model by a `part of model' test in which the other world variables are simulated by a reduced form VAR of the unknown true world model. We show by Monte Carlo experiments that these tests have high power. Our findings are that the Gravity version of the world model is rejected strongly for two of these country cases, but passes the test for the other two. By contrast the Classical model is comfortably accepted in all cases; our power experiment implies that this world model is very likely to be close to the truth and should therefore be used for policy analysis. The policy message of the classical model is that protection is damaging to welfare; this includes protection by customs union, where even though some members may gain, general welfare is reduced.

AbstractThe activity of the Shadow Banks in China has been the subject of considerable interest in recent years. Total shadow banking lending has reached over 60% of GDP and has grown faster than regular bank lending. It has been argued that unregulated shadow banking has fuelled a credit boom that poses a risk to the stability of the financial system. This paper estimates a model of the Chinese economy using a DSGE framework that accommodates a banking sector that isolates the effects of lending to the private sector including shadow bank lending. A refinement of the model allows for bank lending including lending by the shadow banks to affect the credit premium on private investment. The main finding is that while financial shocks are significant, it is real shocks that dominate. The model is used to simulate the frequency of growth slowdowns in China and concludes that these are more likely to be driven by real sector shocks rather than financial sector, including shadow bank shocks. This paper differs from other applications in its use of indirect inference to test the fitted model against a three‐equation VAR of inflation, output gap and interest rate.

This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the recent period of financial crisis. It differs from other applications in the use of indirect inference to estimate and test the fitted model. We find that the main shocks that hit China in the crisis were international and that domestic banking shocks were unimportant. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. An analysis of the frequency of crises shows that crises occur on average about every half-century, with about a third accompanied by financial crises. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary.

The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.

Intro -- _GoBack -- _Ref310717193 -- The authors -- Foreword -- Summary -- Tables, figures and boxes -- 1 Introduction -- Philip Booth -- The growth of government spending -- Government spending, taxation and growth -- Recent trends in types of government spending -- Regional differences -- But what about austerity? -- Why does taxation affect economic growth? -- Tax and growth: the evidence -- Designing an effective tax system -- Conclusion -- References -- Part 1 -- The growth of government 1870-2020 -- 2 How should government spending and tax burdens be measured? -- David B. Smith -- Introduction -- It is government spending and not taxation that determines the burden of government activity -- No institution can tax itself -- How do we define the public sector? -- How do we define national output? -- The national accounts revolution: ESA 2010 -- Is there a best buy? -- 3 Historical trends in the government spending and tax ratios -- David B. Smith -- The international experience -- The British experience 1870-2015 -- Regional breakdown of UK government spending -- 4 And they call it austerity -- Ryan Bourne -- Introduction -- Government spending under the coalition -- Government spending under the Conservative government -- The reckoning up: government spending 2010/11 to 2019/20 -- Annex to Chapter 4 -- David B. Smith -- A misleading political myth in the austerity debate -- 5 Spending, tax and economic welfare -- David B. Smith -- Government expenditure by function -- Divergent consequences of the different forms of government spending -- Economic growth and the financing of government spending -- The size of government: maximising growth and welfare -- Conclusions -- References -- Part 2 -- Taxation and Growth: The Empirical Evidence -- 6 Tax and growth: theories and evidence -- Patrick Minford -- Introduction.

_Ref337633482 -- Ref_XBasel%3Areprcb -- Ref_XGoodhartC%3Afisbsc -- Ref_XTurnerA%3Aturnrr -- Ref_XCihakM%3Acasebc -- Table 1 Estimates of tariff equivalents on manufactured goods resulting from all trade barriers (in per cent) -- Table 2 Effects of UK and EU tariff of 10 per cent on agriculture and manufacturing: percentage changes from base -- Table 3 A survey of costs from EU membership -- Table 4 Key European employment directives -- Figure 1 UK membership of international bodies -- Figure 2 Level and composition of producer support in OECD countries -- Figure 3 History and reforms of the CAP -- Figure 4 Scale and dependency -- Figure 5 Emissions intensity, Europe versus the US -- The authors -- Foreword -- Summary -- Tables and figures -- 1 Introduction -- Patrick Minford and J. R. Shackleton -- Principles -- Policies -- Change has to come -- References -- 2 Assigning responsibilities in a federal system -- Martin Ricketts -- Introduction -- Public goods and interjurisdictional spillovers -- Competition between jurisdictions -- The race to the bottom -- Conclusion -- References -- 3 Institutions for European cooperation -- Roland Vaubel -- The renegotiation -- Which institutions does European cooperation require? A summary -- Cooperation - for what? -- The institutions of a common market -- Institutions for joint policies regarding external and scale economies -- Institutions for redistribution among member countries -- Conclusion -- References -- 4 Beyond the ghosts: does EU membership nourish or consume Britain's interests and global influence? -- Gwythian Prins -- Economic measurements are insufficient to judge this question -- How best to nourish British interests: two paradoxes -- Why the EU and its fears are older than you think -- The transforming consequences of the euro -- The flaw in Europeanism -- What the ghosts did