| Abstract | Since initiation of the reform and opening-up policy, in China, there are many facts same with international economy: consumption and output are negative correlated with TB/GDP, and there are many facts different form those both in the developed countries and developing countries and emerging countries: firstly, consumption’s volatility is more than GDP output’s; Secondly, employment is much smoothing. To explain these facts, this article tries to establish a RBC model with three sections in small open economy that incorporates government consumption shocks, capital utilization and investment-specific technological change. It finds that these economic mechanisms have important impacts on real macroeconomic variables and this model can explain about 98% of the actual volatility, can reasonably predict the negative correlations of TB/GDP with macroeconomic variables, can reasonably predict the positive correlations of government consumption with macroeconomic variables, can reasonably predict auto-correlations of macroeconomic variables. After comparative analyzing, it shows that this model would explain better China’s Macroeconomic fluctuations than the classical RBC model in the open economy, which implies that this model is more consistent with the stylized facts of China’s Macroeconomic fluctuations. It also finds that government spending crowds in the consumption and investment in 1979-2009, and argues that modest increases of government spending could play a role of increasing domestic demand. |