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Forecasting China's economic growth and inflation

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  • Higgins, Patrick
  • Zha, Tao
  • Zhong, Wenna

Abstract

Although macroeconomic forecasting forms an integral part of the policymaking process, there has been a serious lack of rigorous and systematic research in the evaluation of out-of-sample model-based forecasts of China's real GDP growth and CPI inflation. This paper fills this research gap by providing a replicable forecasting model that beats a host of other competing models when measured by root mean square errors, especially over long-run forecast horizons. The model is shown to be capable of predicting turning points and to be usable for policy analysis under different scenarios. We find that M2 supply, rather than interest rates, is a key variable for forecasting macroeconomic variables. Annual GDP growth for the next five years is predicted to be close to the 6.5% official target and a future GDP growth path is predicted to be of L-shape rather than U-shape.

Suggested Citation

  • Higgins, Patrick & Zha, Tao & Zhong, Wenna, 2016. "Forecasting China's economic growth and inflation," China Economic Review, Elsevier, vol. 41(C), pages 46-61.
  • Handle: RePEc:eee:chieco:v:41:y:2016:i:c:p:46-61
    DOI: 10.1016/j.chieco.2016.07.011
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    Citations

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    Cited by:

    1. Raül Santaeulàlia-Llopis & Yu Zheng, 2018. "The Price of Growth: Consumption Insurance in China 1989–2009," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(4), pages 1-35, October.
    2. Chen, Kaiji & Waggoner, Daniel F. & Higgins, Patrick C. & Zha, Tao, 2016. "Impacts of Monetary Stimulus on Credit Allocation and Macroeconomy: Evidence from China," FRB Atlanta Working Paper 2016-9, Federal Reserve Bank of Atlanta, revised 01 Oct 2017.
    3. repec:eee:chieco:v:50:y:2018:i:c:p:1-16 is not listed on IDEAS
    4. repec:eee:chieco:v:46:y:2017:i:c:p:110-122 is not listed on IDEAS
    5. Tao Zha & Kaiji Chen, 2017. "The Asymmetric Transmission of China's Monetary Policy," 2017 Meeting Papers 516, Society for Economic Dynamics.

    More about this item

    Keywords

    Out of sample; Density forecasts; Policy projections; Scenario analysis; Probability bands; Random walk; Bayesian priors;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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