The Relationship between Inflation, Output and the Exchange Rate in China - a Provincial and Economic Zone Level Perspective

This paper examines the relationship between inflation, output and the exchange rate in China at a regional and economic zone level in a Phillips curve framework. We examine price dynamics using a panel of data across a number of different techniques. The results of this paper suggests a level of convergence across the three economic zones of Eastern, Western and Inter with regard to the responsiveness of inflation to the level of output. The estimations in this paper also show that there is a degree of non-linearity in the relationship between inflation and output across the three zones with evidence of a concave Phillips curve. A concave Phillips curve points to the declining sensitivity of inflation to the strength of the economy. Finally, we find that different characteristics across 26 Chinese provinces, including the level of foreign capital and the presence of social security, may have an effect of the relationship between inflation, output and the exchange rate