Study On Estimating Potential Output

It is critical for the policy maker who is in charge of formulating appropriate macroeconomic policies to estimate potential output and output gap accurately. First of all, this thesis discusses the theories of potential output and the measuring approaches. Then it analyzes the potential output with China's data and estimates the output gap, on whose basis it discusses the correlativity between the potential output and output gap and relevant microeconomic variables. Finally, it makes a thorough study on both the correlativity between the output gap and economic fluctuation and the composition of the potential output rate.At present, there are many approaches used to estimate potential output and output gap. While making comparative study on various kinds of approaches, this thesis focuses on the HP filter and production function approach, by which it estimates the potential output and output gap and the potential economic growth of China between the year 1978 and 2004. The result shows that: firstly, the output gap of China demonstrates the classical cycle that the fluctuation level alternates in a positive and negative way between 1978 and 2004; secondly, the output gap fluctuates dramatically and frequently before 1995 and smoothly after 1996 especially after 1999; thirdly, since 1999 the increasing pace of output gap has slowed down and it is negative from 2001 to 2004, which suggests that the pro-active fiscal policy implemented from 1998 has played an important part in checking and recovering from economic recession; fourthly, according to the potential output estimated separately by HP filter and production function approach, the average potential output rate from 1978 to 2004 is 9.54% and 9.67% respectively, accordingly, it is a much better choice to stabilize the economic growth rate of China at the level of 8% or 9% through the moderate structural adjustment and the appropriate macroeconomic control in the following years.