Labor Productivity and Phillips Curve in China: Contemporary Investigation

Abstract

The Phillips curve on the trade-off between inflation and unemployment has been debated among economists for more than decades. Several studies have found that Phillips curve is dead in advanced economies and does not exist. Among others, Friedman (1968) stated that Phillips curve does not exist in the long-run because the relationship between inflation and unemployment is a temporary and short-term. On the contrary, Fuhrer (1995) found that Phillips curve is still alive in the United Kingdom; and Malinov and Sommers (1997) found that Phillips curve is still alive and stable in several OECD countries. This paper attempts to investigate whether a long-run Philips Curve exists in China. Using data for the period of 1987-2016 the estimated results of this study indicate that the Phillips curve, which existed during the late 1980s through 2000 in China has been gradually transformed to an almost vertical curve since 2000s, with a correlation of 0.8, indicating the importance of other policy variables including monetary policy and exchange rate regimes.