The Empirical Study Of China’s Regional Output Gap

For years economists and policy makers have paid more attention to the output gapand the potential output than before. The research of output gap and potential output notonly helps us understand the economic cycle, but also provides the theoretical basis forthe policy making. However, scholars at home and aboard usually concern about theoverall output gap, instead of the regional output gap. Against the backdrop of regionalcoordinated development which the government has put forward in recent years, thestudy of regional output gap should be enhanced in order to provide sufficienttheoretical support for the goal of achieving regional coordinated and sustainabledevelopment.In this paper, on the basis of assessing the advantage and disadvantage of all theoutput gap calculation methods, three common methods are used to calculate the outputgap of East, Central, and West Economic Zone with full consideration of currentsituation in our country, namely the linear trend method, the H-P filter, the UC-Kalmanfilter. The linear trend method assumes that the original nonsteady sequence of realGDP data should be steady while the H-P filter and UC-Kalman filter do not have tothat hypothesis. Hence, the calculation of H-P filter and UC-Kalman filter is moreaccurate than the linear trend method, and the former ones are more applicable to thecurrent circumstances of China. The results showed that the linear trend methodoverestimated the output gap volatility compared to the H-P filter and the UC-Kalmanfilter, as its absolute value of the output gap is higher at the same period; the estimationsof these methods are similar with regard to the discipline of volatility. Finally,comparing the calculation of these three methods comprehensively and combining themacro operational situation of the three major Economic Zone since policy of reformand opening-up carried out for over30years, conclusions can be drawn that output gapvolatility of the three major Economic Zone has the same cycles and the same positiveand negative volatility process of classical cycle; there are rate differences in a positivegrowth of regional output gap. Besides, policy proposals are provided based on theresults above.