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Fiscal and monetary policy interaction in the period of Europe's sovereign–debt crisis: an open economy DSGE model linking Euro area and China

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European debt crisis might produce important influence on China via trades and capital flows since European Union is the largest trading partner of China. Especially, it has attracted more and more attention about the fiscal and monetary policy interactions between the Euro area and China in the period of Europe's sovereign–debt crisis. In this paper, an open dynamic stochastic general equilibrium (DSGE) model for China and European Union economy is developed to research this issue. The sufficient important shocks are considered in this model for policy simulation. It can be used to analyse the impact of different shocks to the output, the policy interactions between European Union and China and the transmission path of one specific shock. The empirical results showed some contributions of the surplus of China's foreign trade, the crowd out effect of one country's government expense and the international effect of exchange rate fluctuations.

Keywords: Euro area, China, DSGE models, policy interaction, fiscal policy, monetary policy, Europe, sovereign debt crisis, trade flows, capital flows, dynamic stochastic general equilibrium, simulation, shocks, exchange rate fluctuations

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