The decomposition of disturbances to national output of China-the evidence of sectoral and regional shocks

The Chinese government has established policies to promote its industrial sectors and to develop coastal provinces since the late 1978. To investigate the extent and reason the output growth in China has been influenced by these policies, an error-component model is employed to decompose the importance of sectoral and regional shocks to variations in national output. The results show that both sectoral specific shocks common across regions and regional specific shocks common across sectors are important in explaining the disturbance of national output in China. Specifically, sectoral specific shocks consistently explain relatively more disturbance of Chinese output than regional specific shocks do. Our empirical results are somewhat different from Stockman (1988) and Costello (1993), since they show almost equal explanatory power of sectoral and national shocks in accounting for national outputs in OECD countries.