DP 2023/3 - Makram El-Shagi / Kiril Tochkov: Regional heterogeneity and the provincial Phillips curve in China

Makram El-Shagi, Kiril Tochkov

CFDS Discussion Paper 2023/3


This paper explores the presence of regional heterogeneity in the response of inflation to changes in the output gap in China. We estimate the slope of the provincial Phillips curve for five different price indices using quarterly data over the period 2000-2022. The presence of regional heterogeneity is tested by comparing a fixed effects and a mean group specification. Our results indicate that the slope of the provincial Phillips curve in China is positive and significant for property prices and the producer price index (PPI), which is explained by their focus on non-tradables and goods specific to the local economy, respectively. Other price indices centered on tradables do not show significant sensitivity to provincial output shocks. Regional heterogeneity in the provincial slope is confirmed only in the case of the PPI with around 60% of provinces, including most coastal provinces, exhibiting a positive coefficient. Our findings point to the share of industry and the market power of industrial enterprises as significant contributors to the sensitivity of inflation to provincial demand shocks. Moreover, we show that a stronger market-orientation and a smaller role of the state in a given province are also positively associated with the slope of the Phillips curve.

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