Estimating the potential output and output gap for China's coal cities with pollutants reduction

Abstract

As a result of the dual pressure of declining coal demand and government environmental regulation, the estimated potential output gap of China's coal mining cities provides the basis for increasing production capacity. This study builds potential output gap estimation models incorporating pollutant reduction under both weak and strong disposability assumptions, and decomposes the total output gap (TOG) into a general environmental efficiency gap (GEEG) and environmental regulation gap (ERG) to explore their internal composition. The new model is used to explore the spatiotemporal evolution of China's 42 typical coal cities from 2006 to 2016, and regression models are built to verify spatiotemporal heterogeneity and explore the impact mechanism of some macro variables on the potential output gap. The empirical results show that (1) environmental regulation had a pronounced negative effect on the production capacity of the cities since 2013, with those in East China suffering from the biggest loss of production capacity under environmental regulations, while those in Northeast China are less affected. (2) GEEG remained stable, indicating that environmental efficiency did not improve; however, the differences in GEEG were mainly regional. This spatiotemporal heterogeneity is also further confirmed in the econometric models. (3) The proportion of secondary industry and education level had a significant negative effect on TOG and ERG, while financial support and per capita use of foreign capital had a significant positive effect. There is no evidence that the ratio of technology expenditure has a significant impact on potential output gaps. These findings will benefit in seeking to improve the potential output of China's coal cities.