The Effects of Macroeconomic Shocks on the Distribution of Provincial Output in China: Estimates from a Restricted VAR Model

The extent of inter-regional disparities is an important policy issue in China and the sources of these disparities have been subject to considerable empirical research. Yet we have relatively little empirical knowledge of the effects on the regional distribution of output of shocks to national macroeconomic variables such as GDP and investment. This is an important gap in the empirical literature since much government policy seeks to influence variables such as GDP or uses variables such as investment expenditure as a macroeconomic instrument. It is likely that national shocks will have differential regional impacts and policy-makers need to know the sign, size and timing of such effects before making policy decisions at the national level. We simulate the effects of aggregate shocks on individual provinces’ GDP within the framework of a vector autoregressive (VAR) model restricted in a manner following Lastrapes (Economics Letters, 2005). We use annual data from 1953 to 2012 to estimate the model which includes 28 of China’s provinces and simulate the effects of shocks to aggregate output and investment on provincial outputs. We find great diversity of effects across the provinces and also variability across the effects of different aggregate shocks but little evidence of a systematic influence of aggregate shocks on the distribution of their effects across the provinces.