Output Gap and Regional Inflation in China

This paper focuses on a new estimate on the relationship between output gap and inflation with provincial panel data in China based on Open-Economy Hybrid New Keynesian Phillips Curve Model.The empirical results show that both domestic and foreign output have significant effect on inflation with greater impact of foreign output gap on inflation than local output gap in the eastern region.Furthermore,output gap pressure resulted from other regions has more significant impact on inflation in the eastern region than that in the mid-western region.In addition,there exists reverse causality between output gap and inflation with time lag effect.Local governments reduce inflation pressure by means of cutting down local output gap.