The Gains from Catch-up for China and the USA: An Empirical Framework

As China becomes more closely entwined with the USA, positive shocks in the USA translate into positive outcomes for China, but any gain to the USA is less clear. We develop a framework of two interacting open economies in which Chinese gross domestic product per capita moves towards long-run convergence with the USA. Although the short-run interactions are constant over time, the resulting model implies that the impulse responses of both countries may be sensitive to the timing of shocks. Empirical results show the changing effects of US shocks, with both countries benefiting from the catch-up process.