The gains from catch-up for China and the US: An empirical framework

As China becomes more closely entwined with the US, positive shocks in the US
translate into positive outcomes for China, but the extent of gain for the US during the
convergence process is less clear. We develop an empirical framework of two interacting
open economies in which Chinese GDP per capita moves towards convergence and
cointegration with the US, resulting in a time-varying structural VAR model. As a result,
the impulse responses of the two countries to shocks are sensitive to the timing of the
shock. The changing effects of US shocks are evident in the analysis, which shows that
over the convergence process both the US and China unambiguously benefit from the
catch-up process.