Appendix: Estimated Impulse Response Functions and Steady State Distributions
Aziz, Jahangir, 2008, “Real and Financial Sector Linkages in China and India,” IMF Working Paper 08/95 (International Monetary Fund: Washington, DC).
Bosworth, Barry, and Susan Collins, 2008, Accounting for Growth: Comparing China and India, Journal of Economic Perspectives, pp. 45-66.
Gali, Jordi and Mark Gertler, 1999, “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics, Vol 44, pp. 195-222, (Elsevier: Amsterdam)
Holz, Carsten, 2005, “The Quality and Quantity of Labor in china1978-2000-2025,” Working Paper, (Hong Kong University of Science and Technology: Hong Kong).
Koivu, Tuuli, Aaron Mehrotra, and Riikka Nuutilainen, 2008, “McCallum Rule and Chinese Monetary Policy,” BOFIT Discussion Paper 15/2008 (Bank of Finland: Helsinki).
Litterman, Robert B., 1986. “Forecasting with Bayesian Vector Autoregressions-Five Years of Experience,” Journal of Business & Economic Statistics, Vol. 4, pp. 25-38.
Rotenberg and Woodford (1997) “An optimisation-based econometric framework for the evaluation of monetary policy”, in NBER Macroeconomic Annual 1997, Ben Bernanke and Julio Rotemberg, eds, pp 297-346, (MIT Press: Cambrige, MA)
Rumler, Fabio, 2005, “Estimates of the Open Economy New Keynsian Phillips Curve for Euro Area Countires,” ECB Working Paper No. 496 (ECB: Frankfurt).
Villani, Mattias, 2005, “Inference in Vector Autoregressive Models with an Informative Prior on the Steady State,” Working Paper No. 181, (Sveriges Riksbank: Stockholm).
Yiping, Huang, Wang Xun, and Hua Xiuping, 2010, “What Determine China’s Inflation?” China Center for Economic Research Working Paper 2010-2.
Zhang, Jinghai, Angang Hu, and Arne Bigsten, 2009, “Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States amd the European Union,” Federal Reserve Bank and St. Louis Review, pp. 317-42.
Zhang, Wenlang, and Daniel Law, “What Drives China’s Food Price Inflation and How Does it Affect Aggregate Inflation?” HKMA Working Paper 06/2010 (HKMA: Hong Kong SAR).
I would like to thank Ashvin Ahuja, Steve Barnett, Nigel Chalk, Roberto Guimaraes, Gaofeng Han, Papa N’Diaye, Filiz Unsal, James Walsh, Wenlang Zhang, and participants at a PBC seminar for their helpful comments and discussions. All remaining errors are my own.
The log of marginal cost is proportional to the output gap in a framework without variable capital. While this is not true in a world with variable capital, Gali and Gertler (1999, p. 201) note that simulations suggest “that the relationship remains very close to proportionate.”
Estimating the same models with total CPI (unreported) results in a larger estimated impact of the output gap in inflation, a larger impact of inflation expectations, and a generally smaller estimated impact of the foreign price gap. The differences possibly suggest an important role for food price expectations, and reflect the lower imported input component of domestic food.
Results are little changed if a break in mid-2005 is allowed for to reflect the impact of the change in the exchange rate regime at that time.
In the text we present the multiplier of various domestic variables from foreign variables, with the impulse response functions and the corresponding confidence intervals displayed in the Appendix.
2003 saw the largest area (particular non-forest area) destroyed by fire and the most damage created by air and water pollution since 2000 (China Statistical Yearbook).
Although historical GDP per capita (1986–1990) is shown in the chart, this is very highly correlated though time (over 0.9 for subsequent 5-year periods).
To control for other factors, the VAR also includes foreign inflation in domestic prices (based on changes in the WEO import deflator for China), the output gap derived using a HP filter from output of both high and low income provinces, and national money growth. Provinces are divided between high and low income based on whether their 1986–1990 per capita GDP was less than Y1,090 (90 percent of median per capita GDP) or not. This results in 19 of 31 provinces being classified as high income, with the remainder classified as low income. The VAR is estimated with annual data from 1988 to 2009. High income variables are ordered above low income variables given the importance of migrant remittance flows and that production is concentrated in high income provinces.
I would like to thank Steve Barnett for suggesting this possibility.
In 2009, around 30 percent of Hong Kong SAR’s food imports come from the Mainland, while food imports from China account for around 8 percent of Taiwan Province of China’s total imports and 55 percent of imports for mainland China.