The Study On The Relationship Between The Output Gap And The Price Level In China:1978—2013

The potential output is the maximum output of an economy with full using of the economic resources. Output gap is the difference between the actual output and potential output. Prices reflect the average level of price of goods and services of an economy. It’s one of the most important economic indicators. Fluctuations in the price level will have a significant impact on economic movement. Through empirical analysis scholars found that the positive output gap is often accompanied by the rise in price and the negative output gap is often accompanied by the correction of price. While the Phillips curve has explained the output gap and the economic relationship between the price level theoretically. But scholar was controversial about the way and the deadline of the impact of output gap on price. And the study on the impact of price on the output gap is less involved. Thus determine the research question of this article is: 1, the impact of output gap on price level is the current or lag? 2, the output gap has influences on short-term or long-term effects on price level? 3, the way and the deadline of the impact of price level on the output gap? So the research about the relationship between the output gap on price level not only can provide guidance for price regulation policy but also can promote the development of the related research. So this paper has theoretical and practical significance.First, through the literature review, comparison different potential output and output gap measuring method based on the theory and measurement accuracy, choice the production function method to measure China’s potential output and output gap in 1978-2013. And then is the definition of the concept of potential output and the theoretical analysis of the bidirectional influence between the output gap and the price level. On the basis of clear concept of potential output, the paper concluded that the output gap has the currently positive influence on price level based on the theory of Phillips curve, and found prices have negative effect on the output gap based on the theory of aggregate demand – supply. Finally this paper choose production function method to measure China’s potential output and output gap. Respectively calculated of China’s capital stock, potential employment and total factor productivity data, and then use the CD production function to detect the potential output and the output gap of China’s 1978-1978, and use the consumer price index(CPI) express the price level, building the VAR model and use the granger causality test, impulse analysis and variance decomposition method to empirical analysis the effect between the output gap and the price level.According to the theory and empirical analysis in this paper, the main conclusions are: 1, the output gap has a lag effect on price level without current influence; 2, the output gap have a positive impact on prices in the short term, have negative impact in the midterm, have little impact in the long-term; 3, the price level have negative impact on the output gap in a short-term, the long-term effect is almost zero. At the end of the paper, according to the research conclusion of this paper we propound policy Suggestions on China’s macroeconomic policy to guide public price expectations, strengthening coordination of short-term and long-term policy, adjusting of economic structure.