# Competition and regional Phillips curve: Evidence from China

## TL;DR

This paper studies how competition in product markets affects the relationship between inflation and output in China, finding that competition mainly influences this link through price rigidity.

## Contribution

The paper introduces a New Keynesian model with Calvo pricing and Kimball aggregation to quantify how competition affects the Phillips curve slope in China.

## Key findings

- More competitive markets increase real rigidity and decrease nominal rigidity, affecting the Phillips curve slope.
- Regions with higher competition show a stronger inflation-output trade-off due to dominant nominal rigidity effects.
- Counterfactual experiments confirm that nominal rigidity is the main driver of differences in the Phillips curve.

## Abstract

The product market competition affects the non-neutrality of monetary policy. This paper quantitatively assesses its impact on the slope of the Phillips curve through the channels of nominal and real rigidity. We build a New Keynesian model using the Kimball aggregator and the Calvo staggered pricing scheme. We show that a more competitive market environment has opposite effects on the slope of the Phillips curve by increasing the real rigidity and lowering the nominal rigidity. We then estimated the model using regional data of China. The Bayesian estimation shows that the response of inflation-output trade-off is larger in the region with a high degree of competition. Counterfactual experiments demonstrate that nominal rigidity has a dominant role and accounts for the majority of the difference in the Phillips curve, while the contribution of real rigidity is relatively minor. Our results highlight the key role of nominal rigidity in determining the inflation-output dynamics.