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Output gap measurement and the New Keynesian Phillips curve for China

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  • Zhang, Chengsi
  • Murasawa, Yasutomo

Abstract

The 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 Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 6 ()
Pages: 2462-2468

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2462-2468

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Output gap; NKPC; Inflation; Bayesian estimator; Monetary policy;

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Cited by:
  1. 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.
  2. 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.
  3. 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.

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