In a Bank for International Settlements working paper, Mikael Juselius and Wenzhe Li find that China’s inflation is strongly and stably linked to economic slack and inflation expectations, indicating that the New Keynesian Phillips Curve can be used to interpret Chinese inflation dynamics. The paper also finds that inflation adjusts slowly, with past inflation carrying about the same weight as expectations, while open-economy versions of the model fit the data slightly better than closed-economy versions. The analysis uses recent quarterly data and Consensus Economics survey forecasts for inflation expectations, addressing weaknesses in earlier studies that relied on older samples or indirect expectation measures. The authors test both closed and open economy specifications, including external drivers such as exchange rates, and report that the results remain robust when using alternative measures of inflation and slack and different model formulations. The paper concludes that the standard New Keynesian framework can be applied to China without adjustments for specific institutional features, and that accurate inflation expectations and assessments of economic conditions matter for keeping inflation low and stable.
Bank for International Settlements2026-05-28
Bank for International Settlements research finds China’s inflation-output link is strong and stable
The Bank for International Settlements published a working paper finding that China’s inflation is strongly and stably linked to economic slack and inflation expectations, supporting use of the New Keynesian Phillips Curve to interpret Chinese inflation dynamics. Using recent quarterly data and survey-based expectations, the authors show that inflation adjusts slowly, open-economy specifications fit slightly better than closed-economy versions, and the standard New Keynesian framework applies to China without adjustments.