The Chinese Phillips curve – inflation dynamics in the presence of structural change

Paul Gerard Egan, Anthony J Leddin

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)
    35 Downloads (Pure)

    Abstract

    This paper models inflation dynamics in China from 1987 to 2014 using a Phillips curve framework. The Phillips curve is generally estimated under the assumption of linearity and parameter constancy. The existence of structural breaks in China’s inflation dynamics make standard linear models inappropriate tools for analysis however. Our results find that the Chinese Phillips curve is characterised by a non-linear relationship. The inflation/output relationship takes the form of a concave curve. This suggests that changes in the level of output effect inflation in China more strongly in periods when output is operating below its potential but the relationship is weaker when output is operating at or above potential. Based on these findings, the People’s Bank of China (PBC) could consider output cost and policy response on a case-by-case basis depending on the level of output in relation to potential.
    Original languageEnglish
    Pages (from-to)165-184
    JournalJournal of Chinese Economic and Business Studies
    Volume15
    Issue number2
    DOIs
    Publication statusPublished - 16 May 2017

    Keywords

    • China
    • Phillips curve
    • Inflation
    • Markov switching
    • Structural breaks
    • Monetary policy

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