Social Sciences in China (Chinese Edition)

No.8, 2017

Correlation of the Virtual and the Real Economy: Empirical Research at the Level of Scale and Periodicity

(Abstract)

Su Zhi, Fang Tong and Yin Libo

The virtual economy’s divergence from the real economy has become a classic feature of the global economic system, and China is no exception. On the basis of the GVAR model and 1992-2016 macro-economic and financial data of major representative countries across the globe, we conducted research focused on testing the correlation between the virtual and the real economy in China in terms of scale and periodicity within the framework of economic globalization. Our findings show that both scale and cyclical fluctuations demonstrate the increasing divergence of the virtual and the real economy. At the level of scale, the virtual economy is unresponsive to the real economy’s reaction to shocks but is more sensitive to shocks to itself, and has a “crowding out effect” on the real economy. At the level of cyclical fluctuations, the real economy just has a short-term pilot effect on the virtual economy. A nonlinear Granger causality test further confirms the fact of divergence. In these circumstances, pricing and monetary policy can suppress the tendency for the virtual economy to diverge from the real economy. Our analyses provide detailed empirical support for the three kinds of structural imbalance in the new normal of the Chinese economy pointed out by General Secretary Xi Jinping.