How Has Globalisation Affected Inflation in C hina?

Abstract This paper investigates how globalisation has affected inflation in China. We estimated standard Phillips curve inflation equations and examined whether globalisation has affected the structure of inflation dynamics as captured by the Phillips curve. Empirical results suggest that the globalisation of the Chinese economy has changed the behaviour of inflation dynamics. In particular, the impact of domestic and global output gaps on domestic inflation in China has changed significantly since 1994. Before 1994, the domestic output gap was a major factor in driving domestic inflation. After 1994, however, the global output gap plays a significant and more important role in affecting domestic inflation. The finding implies that Chinese monetary authorities should specifically take into account the developments in global output in their monetary policymaking process.