Abstract:
We estimate output gaps using three methods for Mainland China on annual data
spanning 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.
JEL classification: C22, E30, E40, E53
Keywords: output gap, Phillips curve, China, omitted variables