Output gap measurement and the New Keynesian Phillips curve for China
AbstractThe New Keynesian Phillips curve implies that the output gap, the deviation of the actual output from its natural level due to nominal rigidities, drives the dynamics of inflation relative to expected inflation and lagged inflation. This paper exploits the empirical success of the New Keynesian Phillips curve in explaining China's inflation dynamics with a new measure of the output gap. We estimate the output gap using the Bayesian multivariate Beveridge–Nelson decomposition method, based on a multivariate dynamic model featuring distinct interactions among inflation, money, and real output in China. The empirical results using quarterly data spanning 1979–2010 show that the new measure of the output gap outperforms the traditional measures in fitting the New Keynesian Phillips curve. This result provides useful insights for inflation dynamics and monetary policy analysis in China.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 28 (2011)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Output gap; NKPC; Inflation; Bayesian estimator; Monetary policy;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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- Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
- Saman, Corina & Pauna, Bianca, 2013. "New Keynesian Phillips Curve for Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 159-171, June.
- Holz , Carsten A. & Mehrotra, Aaron, 2014.
"Wage and price dynamics in a large emerging economy: The case of China,"
BOFIT Discussion Papers
3/2014, Bank of Finland, Institute for Economies in Transition.
- Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
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