Research On The Effect Of Output Gap On Inflation In China

The international economic situation is facing a lot of uncertainty in these days.Under such an unstable international situation,China,as the largest emerging developing country in the world,is now facing the lowest growth rate within recent 20 years,and it may lead to lower speed of economic growth.Potential output and inflation are two of the most important macroeconomic variables in the economic growth.Therefore,in this special moment for Chinese economy,doing researches on the relationships between the output gap and inflation will probably help to assist the related government departments to regulate the economy.Based on the previous researches from other scholars,this paper is aiming to explore the impact of potential output on inflation in China.Firstly,the advantages and disadvantages of various methods are explored through the literature review,and the research methods of output gap are summarized.The Multivariate State space model is constructed by using the Kalman filter algorithm to estimate the Chinese potential output from the year of 1995 to the year of 2015.Secondly,based on the literature review on the relationship between output gap and inflation,the Granger causality test model based on VAR model was used to analyze the relationship between output gap and inflation,from which the empirical results were obtained as well.Thirdly,based on the related theory,the form of Phillips curve is determined by empirical analysis.Finally,through the improved AD-AS Model analysis and the theoretical model of the construction analysis,several relevant conclusions and policy suggestions are made.After theoretical and empirical analyzes on the relationship between output gap and inflation,this paper draws the following conclusions.To start with,China's inflation mechanism is an adaptive form,which means that China's output gap and changes of inflation follow a positive causal relationship.Secondly,the position of the different output gaps in our country has a great influence on the economy's condition and economic development.Lastly,started in the natural level,the output will come back to the natural output level in the long run,but inflation will be more serious.