MODELING THE PHILLIPS CURVE IN CHINA: A NONLINEAR PERSPECTIVE

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.