Output gap measurement and the New Keynesian Phillips curve for China

Chengsi Zhang and Yasutomo Murasawa

Economic Modelling, 2011, vol. 28, issue 6, 2462-2468

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.

Keywords: Output gap; NKPC; Inflation; Bayesian estimator; Monetary policy (search for similar items in EconPapers)
JEL-codes: C11 C22 E31 E32 E50 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:6:p:2462-2468

DOI: 10.1016/j.econmod.2011.07.003

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