Abstract

China's economic transition is essentially the process of China's institutional changes. During the changes, the appearance of institutional innovation is not regular; instead, it is intermittent and random. The purpose of this paper is to show that the fitful appearance of institutional innovation is the root of China's economic growth and fluctuations.Design/methodology/approachThis paper constructs a real business cycle (RBC) model introducing the institutional factor expressed in the quantitative form under the dynamic stochastic general equilibrium (DSGE) framework by measuring China's institutional changes quantitatively.FindingsBy comparing the characteristics of the actual economic data with those of the simulated economic data, we find that this RBC model can explain 94.44%, 66.07%, 23.46%, 21.03% and 15.45% of the cyclical fluctuations in output, investment, labor, consumption and capital, respectively.Originality/valueThe impulse response analysis finds that the institutional shocks have a relatively long duration, lasting about 30 years, and decline slowly over time, while technological shocks decline relatively fast, lasting approximately ten years.