A Core Scientific Question in Macroeconomics and Its Solution: A New Analytical Paradigm from the “Gross-Growth-Rate Time-Series” Perspective

Abstract: How to incorporate growth, fluctuations, and structural change into a unified analytical framework is a fundamental theoretical issue that has remained unresolved in macroeconomics for nearly half a century. The traditional two “dichotomies”, namely separating growth from fluctuations and treating structural change as relatively independent of growth, have made it difficult for the relevant models to directly study “fluctuations of growth” or directly handle changes in structural ratios such as the consumption-output ratio, resulting in a disconnect between theory and reality. To solve this fundamental theoretical issue, this paper proposes a new perspective of “Gross-Growth-Rate Time-Series”, where the gross growth rate is defined as the current value of a level variable divided by its own previous value. Drawing on the successful practice and experience of “Gradual Incremental Reform”, in which “Stock Adjustment” and “Incremental Optimization” proceed in parallel in China and other developing countries, the paper establishes a “Marginal Analysis Method Based on Lagged Structural Ratios for Current Gross Growth Rates” (hereinafter the “Lagged-Growth Marginal Analysis Method”, or LGMA Method), which directly builds and solves an optimization decision model for growth variables and the associated structural ratio variables. This yields the “Growth-and-Structure Dynamic General Equilibrium (GaS-DGE)” and the “Growth-and-Structure Dynamic Stochastic General Equilibrium (GaS-DSGE)” frameworks, which are further refined into a new macroeconomic analytical paradigm of the “Dynamic Relative Equilibrium (DRE)” and the “Dynamic Stochastic Relative Equilibrium (DSRE)”. This paper also responds to Romer’s (2016) critique that shocks in DSGE models are overly contrived and arbitrary by identifying two testable technical deficiencies and offering a preliminary solution through TFP growth shocks that directly act on the real economy. The paper further finds that, based on the new perspective of Gross-Growth-Rate Time-Series and the LGMA Method, it not only solves the above fundamental theoretical issue in macroeconomics but also addresses the core scientific question of Chinese macroeconomics: how to optimally allocate current gross-growth-rate resources given the previous period’s stocks. These new frameworks constructed in this paper not only have distinct Chinese characteristics but also possess universal academic value, as their core concepts and analytical logic that can be extended worldwide. On the policy front, counterfactual simulation analysis of the Chinese case shows that the conclusion that higher TFP growth leads to a decline in the consumption-output ratio highlights the necessity and urgency of “vigorously boosting consumption” and “promoting a virtuous cycle between consumption and investment”.