Abstract: In the framework of New Keynesian Theory, according to the latest international definition of the output gap, this paper integrates the characteristics of Chinese economy to build a dynamic stochastic general equilibrium model. Then it estimates China’s quarterly output gap with the Bayesian approach. Afterwards, it makes a comparison with the output gaps estimated by other approaches and conducts a stability test and analysis with the model. The empirical results show that to define output gap as the deviation of the actual output relative to its flexible prices equilibrium level can better explain the process of China’s economic periodic changes. From the third quarter of 2010, China’s output gap volatility tends to be stable, which is basically consistent with the“Great Moderation”phenomenon.

Key words: output gap; dynamic stochastic general equilibrium; great moderation