Assessing The Phillips Curve in China: An Empirical Study of Inflation and Unemployment

Abstract

China's inflation rate (IR) has generally remained moderately fluctuating, while the unemployment rate (UR) has shown a phased upward trend under economic transformation. Studying these two fields is conducive to the central bank's regulation and control of fiscal and monetary policies. Given China's distinct economic structure and government-controlled labor market, it remains unclear whether the classical Phillips Curve (PC) or the New Keynesian Phillips Curve (NKPC) holds in this context. The research aims to test the theoretical feasibility of applying PC models within China's economy and provide empirical insights into inflation-unemployment dynamics. To capture both short- and long-term dynamics, annual data from 1978 to 2021 was utilized and applied to the linear regression model and autoregressive distributed lag (ADL) model to test the performance of the classical PC and the NKPC in China respectively. The findings of the Johansen cointegration test indicate the independent variables—UR, gross domestic product index (GDPI), exchange rate (ER), and national savings rate (NSR)—demonstrate a long-term influence on the dependent variable IR, which supports the applicability of the PC in this context. From an academic perspective, the study enriches the literature by extending the PC framework to a developing, transitionary economy, offering a methodological reference for future research.