Output Gaps and Inflation in Mainland China
Bank for International Settlements, Monetary and Economic Department, 2006 - Inflation (Finance) - 27 pages
We estimate output gaps using three methods for Mainland China on annual data panning 1982-2003. The estimates are similar and appear to co-move with inflation. Standards Phillips curves, however, do not fit the data well. This may reflect the omission of some important variable(s) such as the effect of price deregulation, trade liberalisation and /or changes in the exchange rate regime. We reestimate the Phillips curves assuming that there is an unobserved variable that follows an AR(2) process. The modified model fits the data much better and accounts for some of the surprising features of the simple Phillips curve estimates.
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95 percent conﬁdence aggregate demand aggregate supply autocorrelated captured Chow consumer price index data much better Deﬁning denotes signiﬁcance determination of inﬂation econometric economy empirical equation estimate output gaps estimate the model factors Feng Zhu ﬁnding ﬁrst ﬁts the data gaps and inﬂation GDP deﬂator Gerlach and Yiu growth rate Heytens and Zebregs highly signiﬁcant HP ﬁlter HPGAP UCGAP impact on inﬂation inﬂation process insigniﬁcant Kalman ﬁltering liberalisation likelihood function macroeconomic Mainland China Measures of Inﬂation Monetary movements in inﬂation NLS estimates omitted variable p-value past inﬂation percent conﬁdence band Phillips curve model price deregulation price index PPI producer price index production function approach R-squared rate of inﬂation rate of potential real GDP reestimate reﬂects regression relationship between inﬂation residuals results in column retail price index serial correlation speciﬁcation standard Phillips curve supply shocks Table TGAP traditional Phillips curve UC approach unobservable components unobserved variable value of t-statistics