The real cost channel and the Phillips Curve for China

Recent evidence indicates that the Phillips Curve (PC) has flattened, as shown by a decline in its slope. Concurrently, significant fluctuations and an upward trend in China's real interest rates have widened the divergence from nominal interest rates. Motivated by these observations, we estimate the PC incorporating the real cost channel, which captures the effect of real interest rates on firms' marginal costs. Using macroeconomic data for China, we find that the real cost channel contributes to explaining the flattening of the PC for China. Furthermore, the influence of the real cost channel on the PC has intensified in recent years.