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A Phillips Curve for China

Jorg Scheibe

University of Oxford

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

March 2005

CEPR Discussion Paper No. 4957

This paper models Chinese inflation using an output gap Phillips curve. Inflation modelling for the world's sixth largest economy is a still under-researched topic. We estimate a partially forward-looking Phillips curve as well as traditional backward-looking Phillips curves. Using quarterly data from 1988 to 2002, we estimate a vertical long-run Phillips curve for China and show that the output gap, the exchange rate, and inflation expectations play important roles in explaining inflation. We adjust for structural change in the economy where possible and estimate regressions for rolling sample windows in order to test for and uncover gradual structural change. We evaluate a number of alternative output gap estimates and find that output gaps which are derived from production function estimations for the Chinese economy are of more use in estimating a Phillips curve than output gaps derived from simple statistical trends. Partially forward-looking Phillips curves provide a better fit than backward-looking ones. The identification of a non-increasing exchange rate effect on inflation during a period of large import growth hints at increased pricing to market behavior by importers. This result is relevant to policies regarding possible exchange rate liberalization in China.

Number of Pages in PDF File: 43

Keywords: Phillips curve, China, output gap, monetary policy, structural change

JEL Classification: E12, E31, E32

Date posted: July 27, 2005  

Suggested Citation

Scheibe, Jorg and Vines, David, A Phillips Curve for China (March 2005). CEPR Discussion Paper No. 4957. Available at SSRN: https://ssrn.com/abstract=770244

Contact Information

Jorg Scheibe
University of Oxford ( email )
United Kingdom
David Vines (Contact Author)
University of Oxford - Balliol College - Department of Economics ( email )
Manor Road
Oxford, OX1 3BJ, Oxfordshire OX13UQ
United Kingdom
+44 1865 271 067 (Phone)
+44 1865 271 094 (Fax)
Australian National University (ANU)
Canberra, Australian Capital Territory

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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