Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-23T06:20:40.388Z Has data issue: false hasContentIssue false
  • English
  • Français

MODELING THE PHILLIPS CURVE IN CHINA: A NONLINEAR PERSPECTIVE

Published online by Cambridge University Press:  24 May 2016

Lingxiang Zhang
Lingxiang Zhang*
Affiliation:
Beijing Institute of Technology
*
Address correspondence to: Lingxiang Zhang, School of Management and Economics, Beijing Institute of Technology, Beijing, Haidian District 100081, People's Republic of China; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates the nonlinear dynamics of the inflation–output type of Phillips curve based on a multiple-regime smooth transition regression model using data from China. The empirical results indicate significant nonlinearities in China's Phillips curve. The relationship between inflation and output can be modeled by a four-regime smooth transition regression model in which the responses of inflation to output depend on both inflation and economic growth rates. The inflation–output type Phillips curve may be positively sloped, negatively sloped, or even vertical in the short term, depending on different business cycles. Furthermore, we analyze business cycle fluctuations based on the nonlinear Phillips curve, indicating a coexisting zone of stable inflation rate and rapid growth rate.

Keywords

Phillips CurveMultiple-Regime Smooth Transition Regression ModelBusiness Cycle
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 2 , March 2017 , pp. 439 - 461
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This research was funded by grants of the National Social Science Fund of China (No.13CJY011), the National Natural Science Foundation of China (No. 71372015), and the National Natural Science Foundation of China (No. 71272060).

References

REFERENCES

Arghyrou, M. (2005) Non-linear inflationary dynamics: Evidence from the UK. Oxford Economic Papers 57, 51–69.CrossRefGoogle Scholar
Balke, N.S. and Fomby, T.B. (1997) Threshold cointegration. International Economic Review 38, 627–645.CrossRefGoogle Scholar
Ball, L. and Mankiw, G. (1994) Asymmetric price adjustment and economic fluctuations. Economic Journal 104, 247–261.CrossRefGoogle Scholar
Ball, L., Mankiw, G., and Romer, D. (1988) New Keynesian economics and the output inflation trade-off. Brookings Papers on Economic Activity 1, 1–65.Google Scholar
Bec, F., Guay, A., and Guerre, E. (2008) Adaptive consistent unit-root tests based on autoregressive threshold model. Journal of Econometrics 142, 94–133.Google Scholar
Bec, F., Salem, M.B., and Carrasco, M. (2010) Detecting mean reversion in real exchange rates from a multiple regime STAR model. Annales d'économie et de statistique 99/100, 395–427.Google Scholar
Benhabib, J., Schmitt-Grohé, S., and Uribe, M. (2001) Monetary policy and multiple equilibria. American Economic Review 91, 167–186.Google Scholar
Brandt, L. and Zhu, X.D. (2000) Redistribution in a decentralized economy: Growth and inflation in China under reform. Journal of Political Economy 108, 422–439.CrossRefGoogle Scholar
Brandt, L. and Zhu, X.D. (2001) Soft budget constraint and inflation cycles: A positive model of the macro-dynamics in China during transition. Journal of Development Economics 64, 437–457.Google Scholar
Caner, M. and Hansen, B.E. (2001) Threshold autoregression with a unit root. Econometrica 69, 1555–1596.Google Scholar
Canova, F. (2007) G-7 inflation forecasts: Random walk, Phillips curve or what else? Macroeconomic Dynamics 11, 1–30.Google Scholar
Chow, G.C. (2011) Usefulness of Adaptive and Rational Expectations in Economics. CEPS working paper 221.Google Scholar
Clarida, R., Galí, J., and Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.Google Scholar
Coe, D. and McDermott, J. (1997) Does the Gap Model Work in Asia? International Monetary Fund working paper series 96/69.Google Scholar
Corrado, L. and Holly, D. (2003) Nonlinear Phillips curves, mixing feedback rules and the distribution of inflation and output. Journal of Economic Dynamics and Control 28, 467–492.Google Scholar
Debelle, G. and Laxton, D. (1997) Is the Phillips curve really a curve? Some evidence for Canada, the United Kingdom and the United States. IMF Staff Papers 44, 249–282.Google Scholar
Dupasquier, C. and Ricketts, N. (1998) Non-linearities in the Output–Inflation Relationship: Some Empirical Results for Canada. Bank of Canada working paper 98–14.Google Scholar
Eitrheim, O. and Teräsvirta, T. (1996) Testing the adequacy of smooth transition autoregressive models. Journal of Econometrics 74, 59–75.Google Scholar
Enders, W. and Granger, C.W.J. (1998) Unit root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business and Economic Statistics 16, 304–311.Google Scholar
Evans, G.W., Honkapohja, S. and Marimon, R. (2001) Convergence in monetary inflation models with heterogeneous learning rules. Macroeconomic Dynamics 5, 1–31.Google Scholar
Filado, A.J. (1998) New evidence on the output cost of fighting inflation. Economic Review (third quarter), 33–61.Google Scholar
Fisher, T.C.G. (1989) Efficiency Wages: A Literature Survey. Working paper 89–5, Bank of Canada.Google Scholar
Friedman, M. (1968). The role of monetary policy. American Economic Review 58, 1–17.Google Scholar
Galí, J. and Gertler, M. (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.Google Scholar
Gali, J., Gertler, M., and Lopez-Salido, D. (2005) Robustness of the estimates of the hybrid New Keynesian Phillips curve. Journal of Monetary Economics 52, 1107–1118.CrossRefGoogle Scholar
Gerlach, S. and Peng, W. (2006) Output gaps and inflation in mainland China. China Economic Review 17, 210–225.Google Scholar
Gong, G. and Justin, Y.F. Lin (2008) Deflationary expansion: An overshooting perspective to the recent business cycle in China. China Economic Review 19, 1–17.Google Scholar
Gordon, R.J. (1998) Foundations of the goldilocks economy: Supply shocks and the time-varying NAIRU. Brookings Papers on Economic Activity 2, 297–346.CrossRefGoogle Scholar
Gordon, R.J. (2011) The history of the Phillips curve consensus and bifurcation. In Special Issue: A. W. H. Phillips 50th Anniversary Symposium, Economica 78, 10–50.Google Scholar
Ha, J., Fan, K., and Shu, C. (2003) The causes of inflation and deflation in mainland China. The Hong Kong Monetary Authority Quarterly Bulletin 9, 23–31.Google Scholar
Huh, H.S. and Jang, I. (2007) Nonlinear Phillips curve, sacrifice ratio, and the natural rate of unemployment. Economic Modelling 24, 797–813.Google Scholar
Kapetanios, G., Shin, Y., and Snell, A. (2003) Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics 112, 359–379.Google Scholar
Kiliç, R. (2011) Testing for a unit root in a stationary ESTAR process. Econometric Reviews 30, 274–302.Google Scholar
Kojima, R., Nakamura, S., and Ohyama, S. (2005) Inflation Dynamics in China. Bank of Japan working paper series 05-E-9.Google Scholar
Lacker, J.M. and Weinberg, J.A. (2007) Inflation and unemployment: A layperson's guide to the Phillips curve. Economic Quarterly 93, 201–227.Google Scholar
Laxton, D., Rose, D., and Tambakis, D. (1999) The U.S. Phillips curve: The case for asymmetry. Journal of Economic Dynamics and Control 23, 1459–1485.Google Scholar
Lucas, R.E. Jr., (1972) Expectations and the neutrality of money. Journal of Economic Theory 4, 103–124.Google Scholar
Lucas, R.E. Jr., (1973) Some international evidence on output–inflation tradeoffs. American Economic Review 63, 326–334.Google Scholar
Macklem, T. (1997) Capacity constraints, price adjustment and monetary policy. Bank of Canada Review (Spring): 39–56.Google Scholar
Marcet, A. and Sargent, T.J. (1989). Least squares learning and the dynamics of hyperinflation. In Barnett, W.A., Geweke, J., and Shell, K., (eds.), Economic Complexity: Chaos Sunspots, Bubbles and Nonlinearity, pp. 119–136. Cambridge, UK: Cambridge University Press.Google Scholar
Mehrotra, A., Peltonen, T. and Rivera, A.S. (2010) Modelling inflation in China–-A regional perspective. China Economic Review 21, 237–255.Google Scholar
Narayan, P.K., Narayan, S., and Smyth, R. (2009) Understanding the inflation–output nexus for China. China Economic Review 20, 82–90.Google Scholar
Nobay, A.R. and David, A.P. (2000) Optimal monetary policy with a nonlinear Phillips curve. Economics Letters 67, 159–164.CrossRefGoogle Scholar
Nobay, B., Paya, I., and Peel, D.A. (2010) Inflation dynamics in the U.S.: Global but not local mean reversion. Journal of Money, Credit and Banking 42, 135–150.CrossRefGoogle Scholar
Oppers, S. (1997) Macroeconomic Cycles in China. International Monetary Fund working paper series 97/135.Google Scholar
Park, J.Y. and Shintani, M. (2005) Testing for Unit Root against Transitional Autoregressive Models. Vanderbilt University Department of Economics working paper 05010.Google Scholar
Pavlidis, E.G., Paya, I., Peel, D.A., and Siriopoulos, C. (2013) Nonlinear dynamics in economics and finance and unit root testing. European Journal of Finance 19, 572–588.Google Scholar
Phelps, E. (1967) Phillips curves, expectations of inflation, and optimal inflation over time. Economica 135, 254–281.Google Scholar
Phillips, A.W. (1958) The relation between unemployment and the rate of changes of money wage rates in the United Kingdom, 1861–1957. Econometrica 25, 283–299.Google Scholar
Roberts, J. (1995) New Keynesian economics and the Phillips curve. Journal of Money, Credit and Banking 27, 975–984.Google Scholar
Sargent, T.J. and Wallace, N. (1973) Rational expectations and the dynamics of hyperinflation. International Economic Review 14, 1043–1048.Google Scholar
Schaling, E. (2004) The nonlinear Phillips curve and inflation forecast targeting: Symmetric versus asymmetric monetary policy rules. Journal of Money, Credit and Banking 36, 361–386.Google Scholar
Scheibe, J. and Vines, D. (2005) A Phillips Curve for China. CEPR discussion paper series 4957.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2000) Price-level determinacy and monetary policy under a balanced-budget requirement. Journal of Monetary Economics 45, 211–246.Google Scholar
Stiglitz, J.E. (1984) Price rigidities and market structure. American Economic Review 74, 350–355.Google Scholar
Stiglitz, J.E. (1986) Theories of wage rigidity. In Butkewicz, J.L., Koford, K.J., and Miller, J.B. (eds.), Keynes' Economic Legacy: Contemporary Economic Theories, pp. 153–222. New York: Praeger Publishers.Google Scholar
Stiglitz, J.E. (1997) Reflections on the natural rate hypothesis. Journal of Economic Perspectives 11, 3–10.Google Scholar
Taylor, M.P., Peel, D.A., and Sarno, L. (2001) Nonlinear mean-reversion in real exchange rates: Toward a solution to the purchasing power parity puzzles. International Economic Review 42, 1015–1042.Google Scholar
Teräsvirta, T. (1994) Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89, 208–218.Google Scholar
van Dijk, D. and Franses, P.H. (1999) Modeling multiple regimes in the business cycle. Macroeconomic Dynamics 3, 311–340.Google Scholar
van Dijk, D., Teräsvirta, T., and Franses, P.H. (2002) Smooth transition autoregressive models–-A survey of recent developments. Econometric Reviews 21, 1–47.Google Scholar
Woodford, M. (1994) Monetary policy and price level determinacy in a cash-in-advance economy. Economic Theory 4, 345–380.CrossRefGoogle Scholar
Woodford, M. (1995) Price-level determinacy without control of a monetary aggregate. Carnegie-Rochester Conference Series on Public Policy, 1–46.Google Scholar
Woodford, M. (1996) Control of Public Debt: A Requirement for Price Stability. National Bureau of Economic Research working paper 5684.Google Scholar
Zhang, C. and Murasawa, Y. (2011) Output gap measurement and the new Keynesian Phillips curve for China. Economic Modelling 28, 2462–2468.Google Scholar
Zhang, C. and Murasawa, Y. (2012) Multivariate model-based gap measures and a new Phillips curve for China. China Economic Review 23, 60–70.Google Scholar
Zhang, C., Osborn, D., and Kim, D. (2008) The new Keynesian Phillips curve: From sticky inflation to sticky prices. Journal of Money, Credit and Banking 40, 667–699.Google Scholar
Zhang, L. (2013) Modeling China's inflation dynamics: An MRSTAR approach. Economic Modelling 31, 440–446.Google Scholar