Abstract :This paper analyzes the effect of external factors which include oil price , world interest rates , exchange rate of U. S. dollar and foreign demand on China’s business cycles. Estimated structural vector autoregression model with block exogeneity shows that external shocks are an important source of macroeconomic fluctuations in China. Supply and demand shocks play the same role , but the latter is persistent. In the period of financial crisis , demand shock is more important than supply shock. The policy implication is that government should implement expansionary fiscal policy to replace declining private investment in order to stimulate domestic demand and mitigate permanent shock of foreign demand to economy.
Key words :Business Cycles ; SVAR with Block Exogeneity ; Foreign demand