Inflation in China: Old Versus New Phillips Curves

Abstract

Among the few papers that have examined the determinants of inflation dynamics in mainland China, the majority of those that have investigated this matter argue that the traditional Phillips curve does not fit China's data. Some authors, however, conclude that the New Keynesian Phillips Curve does a better job of describing Chinese inflation behaviour in recent decades. This paper conducts an analysis of China's inflation behaviour from the late 1980s onwards by estimating both traditional and new Phillips curves using improved econometric techniques. We find that the New Keynesian Phillips Curve performs poorly in explaining China's inflation behaviour, whereas the traditional ‘old’ Phillips curve does significantly better.