Abstract

The Phillips curve describes a negative relationship between inflation and unemployment. This paper tests the nonlinearity of the Phillips curve mechanism caused by asymmetric price adjustments in China and Japan. The basic assumption is that when the asymmetries exist, the Phillips curve can be nonlinear. The empirical evidences show that for both China and Japan, the price adjustments are nonlinear and asymmetric. However, the results of threshold AR model reveal that only China has a nonlinear and asymmetric Phillips curve, while the Japanese Phillips curve is linear within the sample period. These findings help to understand the inflation expectations in China and Japan.

Key words

Phillips Curve; Price Adjustment Mechanism; Inflation; Nonlinearity; Asymmetry; TAR

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