Inter-Regional Output Spillovers in China: Disentangling National from Regional Shocks

This paper reports an investigation of the spillover effects of output shocks between regions in China. We use a six-region classification first suggested about two decades ago which still captures relatively homogeneous regions. The six regions are: South East, Changjiang River, Yellow River, North East, South West and North West. We start from a recent paper by Groenewold, Lee and Chen (2005b) which uses the same six regions and a vector autoregressive (VAR) framework. They find that the spillover effects are crucially dependent on the order of the variables in the model and argue that this is due to common national influences. They overcome the “ordering problem” by purging the regional outputs of their common national components using a preliminary regression of regional outputs on national output. We implement an alternative solution to the ordering problem which does not involve this two-step procedure. We proceed by including national output directly into our model. Moreover, we extend their analysis by investigating Granger causality between regional and national output measures as well as block exogeneity. Our results confirm important conclusions of the earlier paper but also raise some interesting differences.