The Channel Relationahip Between CPI And PPI Based On BVAR

Producer price index and consumer price index are the prices of different commodities in the production chain.Studying the relationship between the two can help to identify the nature of inflation and determine whether inflation is caused by supply or demand,so as to give corresponding policy recommendations.With the continuous changes in China’s economic structure in recent years,more and more attention has been paid to structural inflation.From the 2017 producer price index and consumer price index once again raised the academia for the economic outlook and monetary policy debate about whether the two would tend to converge.In the existing research on producer price index and consumer price index,CPI is mainly used as the only indicator of inflation,and the research on PPI is relatively few.In the classical western macro research,such as the theory of production chain,it is considered that the increase of the product cost in the upstream industry will lead to the rise of the price of the downstream final consumer goods.In recent years,some scholars have suggested that ignoring the producer price index will lead to significant welfare losses.Some scholars think that the PPI index has better predictability on macroeconomic fluctuations.It is clear that the transmission mechanism of CPI and PPI contributes to the optimal monetary policy,However,many scholars in the past few years studied the impact of external shocks on inflation,but more focused on the single impact of external prices on CPI or PPI,often neglecting the common influence of CPI and PPI.Based on the above problems,this paper attempts to build a Bayesian autoregressive model to analyze the conduction relationship between CPI and PPI in different periods.Employing Bayeian Vector autoregressive model(BVAR)and a series of tests,this paper discovers the change of CPI index growth rate has a significant impact on the PPI index growth rate,but the reverse does not hold.In bivariate BVAR model,a standard deviation shock of CPI index growth will cause the PPI index growth rate to increase two percentage point.In addition,external shocks and demand shocks will to strong responses of PPI index growth rate and CPI index growth rate,yet the impact of monetary policy on CPI and PPI are trivial.Besides preventing overhoeating of demand,the policy makers should pay attention to the potential negative effect of external cost shocks on the economy.