Research On The Relationship Between Chinese Output Gap And Inflation

This thesis analyzes the relationship between output gap and inflation to reveal in-depth inconsistencies of Chinese economy reflected by inflation, ultimately for the authorities to formulate forward-looking and effective economic policies. Setting out from the reality of China, the thesis estimates Chinese potential output, output gap, growth rate of potential output and equilibrium growth rate during year 1978 to 2009 by building up a dynamic multi-factors econometrics model as the state space form via Kalman filtering. Subsequently it analyzes features and internal principles of Chinese macro economy, then argues that the length of Chinese business cycle is about 9 to 10 years, which shows a new character—the contraction period becomes shorter but the expansion period becomes longer—determined by the reform of the economic system. The thesis gets in the meantime that the long-term growth tendency (or path) of China is about 9.7%, but it will move slightly downward, with acceptable interval of output gap about for [-0.3%,0.3%], corresponding acceptable economic growth interval about for [9%,10%]. On this foundation, with the help of adjusted Phillips curve and Aggregate Demand-Inflation curve, this thesis investigates the relations by Granger causality test as well as the Aggregate Demand-Inflation-Aggregate Supply dynamic and theoretical model to make it clear that the forming mechanism of inflation in China have changed from undulation surrounding constant level to adaptive expectation, which means that output gap has causal effect on the change of inflation rate while no other relations exists and inflation can only be touched off by the increasing aggregate demand in the condition of positive output gap. Nevertheless, inflation and short-term output fluctuation are not able to transform the long-term growth trend of economy. In a further step, from the view point of Marxist economics, the thesis considers that dysfunction of economic system and faultiness of correlated mechanism should be the root causes of output volatility and inflation, which are correlated with the mode of long-term economic development. The authorities can apply these conclusions to forecast the major turning point of business cycle scientifically, to differentiate and analyze the main aspect of short-term economic inconsistencies, and to establish the long-term economic development policies.