Abstract China’s economy has the obvious boom-bust cycles with rapid economic growth since the start of economic reform in 1978. China’s government spending plays an important role in China’s boom-bust cycles under Keynesian fiscal policy. This paper attempts to explain the reality of China’s boom-bust cycles in the macroeconomic fluctuation based on the dynamic stochastic general equilibrium model with the externality of government spending, inverse adjustment to inflation and monetary financing channels of government spending. The results reveal that: (1) the fluctuation of government spending is a major source aggravating China’s boom-bust cycles; (2) the government spending externality is the key mechanism to China’s boom-bust cycles; (3) by the government spending inverse adjustment to inflation and money creation supporting system, the model can simulate that the China’s inflation is procyclical and lags output in boom-bust cycles.
2017, Vol. 34 
