The extent of inter-regional disparities is an important policy issue in China and the sources
of these disparities have been subject to considerable empirical research. Yet we have
relatively little empirical knowledge of the effects on disparities of shocks to national
macroeconomic variables such as GDP, investment and government expenditure. This is an
important gap in the empirical literature since much government policy seeks to influence
variables such as GDP or uses variables such as government expenditure as a macroeconomic
instrument. To the extent that these shocks have predictable consequences for disparities,
policy-makers need to know the sign, size and timing of such effects before making policy
decisions. We simulate the effects of aggregate shocks on individual provinces’ GDP within
the framework of a vector autoregressive (VAR) model restricted in a manner following
Lastrapes (Economics Letters 2005). We use annual data from 1953 to 2010 to estimate the
model which includes all of China’s provinces and simulate the effects of a variety of
aggregate shocks on provincial outputs. We find great diversity of effects across the
provinces and also variability across the effects of different aggregate shocks but little
evidence of a systematic influence of aggregate shocks on the distribution of their effects
across the provinces.