A Restudy On The Transmission Of PPI And CPI

Traditional economic theories think that the change of PPI can transmit to CPI through industry chain, thus PPI is also used to be a lead variable to predict the change of CPI. However, the macro-economic data show that China's PPI and CPI have almost appeared as the phenomenon of Hang Upside Down since 2000, that is, PPI hasn't transmitted to CPI or even reverse transmitted to CPI for a long time, which makes people feel suspicious that whether the PPI can still lead CPI and then leads to a discussion as to the transmission direction of PPI and CPI, but regretfully none conclusion has been reached. Whether PPI can lead CPI has direct effect on the fact that whether PPI can still be the prediction variable of CPI, which will further influence the policies made by relevant departments.Therefore, based on existing research this paper conducts a further study of the question about the transmission direction of PPI and CPI. Firstly, the paper intends to develop insights into the Price Transmission Mechanism on industry chain, the main price indexes, and the probable factors affecting the transmission of PPI and CPI. Then, we choose the variables as the same as the existing research to build a linear model; then Apply the testing method of ARDL-Bounds that can process different order variables to the empirical analysis for the transmission of PPI and CPI, which will overcome the disadvantage of measurement method and data-processing in the existing research. Secondly, we consider that the money policy transmission mechanism may influence the transmission of PPI and CPI as an internal shock so that we add broad money as a variable into the model, but finding that the selected sample period may be so long that the broad money probably has structure change which will also have effects on the transmission of PPI and CPI. Thus we first test the broad money whether has structure change with the method of Bai-Perron endogenous multiple structural changes test, and then inspects the conduction of PPI and CPI using ARDL-ECM model in order to inspect the internal shocks'influence on transmission of PPI and CPI. Finally, in full consideration of internal impact and external impact, this paper introduces the international oil prices and the RMB nominal effective exchange rate as new variables to inspect the conduction of PPI and CPI .Then from the perspective of nonlinear time series, this paper inspects all kinds of variables'short influence to the PPI and CPI using the markov switching model which allows all variables to have different parameters at different time points, and ultimately gets the reasons that short period"Hang Upside Down"phenomenon happens to the transmission of PPI and CPI.The empirical results show that, in the long term, regardless of considering the impact of internal and external shocks to the transmission of PPI and CPI of our country, the changes of PPI to a certain degree can transmit to the CPI through the industry chain at last. Therefore, in the long run, we consider PPI is either still capable of leading CPI and being the prediction variable of CPI or the transmission direction of PPI and CPI is not on one side only.In the sample period broad money does have structure changes, respectively in November 2003, October 2007 and April 2009. Though before and after the structure changes broad money does have cause different influences to the CPI in the short and long period, those influences still can't change the fact PPI transmit to CPI in the long run while only the short influence isn't significant, which is rarely involved in the existing researches. Existing researches have almost not considered the impact of internal and external shocks on transmission of PPI and CPI at the same time. Consequently, compared to the existing research, after considering the impact of internal and external shocks at the same time the study will be more comprehensive, and the result PPI still can lead CPI in the long run the paper ultimately gets will be more accurate.Markov switching model's inspection result shows that the influences of broad money, international crude oil price and RMB nominal effective exchange rate on PPI and CPI have obvious characteristics of three areas. And the"Hang Upside Down"phenomenon is likely to occur to transmission of PPI and CPI in the short period after suffering the impact of broad money's supply and international crude oil price's fluctuation, while RMB nominal effective rate is turned out to be not a significant influencing factor contributing to the short-term"Hang Upside Down"phenomenon of the transmission of PPI and CPI.Accordingly, when use PPI as the lead variable to predict CPI, our government is supposed to pay close attention to the impact of broad money supply and international crude oil price's fluctuation to our country's PPI and CPI, while be less attention to the impact of RMB nominal rate.