UM E-Theses Collection (澳門大學電子學位論文庫)


A Phillips curve for China : an empirical study for the period of 1994-2005

English Abstract

Abstract This paper studies China’s inflation by means of an output-gap Phillips curve. Evaluating China inflation and forex policy by quarterly data is scarce for the period after 2002. Our estimation is conducted for a long period from 1988 to mid 2009 using quarterly data. The period of 1994-2005 can be viewed as a golden episode for the Chinese economy with high growth, low inflation, and minor volatility under a (permanently) fixed exchange rate as a monetary anchor that was made effective by tight capital controls. Yet there has been much nominal fluctuation since China gave up its fixed exchange rate regime in 2005 under heavy foreign pressures which have also made its capital controls increasingly leaky. By testing for the impacts on inflation of those policy shifts and structural changes, we examine whether an inflation targeting regime can be employed as a new useful nominal anchor to enhance China’s monetary policy effectiveness after its fixed exchange rate was phased out and its capital market is increasingly open. We find that during the golden period, output gap alone cannot well explain inflation because China is a highly open economy. Inflation is better accounted for by lagged inflation, changes in the exchange rate, and expected inflation. With an appropriate time lag taken into account, the adjustable fixed exchange rate adopted in 2005-2009 seems to have no significant effect on the economy. We show that there was a structural shift in 1994 with a significant impact on the economy, but not significant in 2005. Thus, making the exchange rate more flexible has no large effect on China's economic structure and growth. Since output gap has little or no effect on inflation, high inflation cannot be used to boost employment under capital controls, and the government should resort to other effective measures to lower unemployment.

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Chang, Oi Meng


Faculty of Business Administration


Department of Finance and Business Economics




Phillips curve

Inflation (Finance) -- China

Monetary policy -- China


Gu, Xin Hua

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