Internal driving mechanism between CPI and PPI on the view of regime switching causality

SUI Jianli, LI Yuerong

Systems Engineering - Theory & Practice ›› 2019, Vol. 39 ›› Issue (4) : 1001-1017.

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Systems Engineering - Theory & Practice ›› 2019, Vol. 39 ›› Issue (4) : 1001-1017. DOI: 10.12011/1000-6788-2018-1990-17

Internal driving mechanism between CPI and PPI on the view of regime switching causality

  • SUI Jianli, LI Yuerong
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Abstract

In order to explore the formation mechanism of inflation, discover the cause of "upside down" between CPI and PPI, provide some scientific advice on stabilizing prices level, stimulating economic growth stably and rapidly, in this paper, considering causal perspective of regime switching of time-varying dynamic causality between FCPI and PPI, NFCPI and PPI, CGPPI and CPI, MPPPI and CPI, we use the Markov switching causality (MSC) model to analyse the nonlinear dynamic drive mechanism of CPI and PPI, and its action path, based on the monthly data of China's CPI, food CPI (FCPI), non-food CPI (NFCPI), PPI, consumer goods PPI (CGPPI) and means of production PPI (MPPPI) from January 2001 to September 2017. The empirical evidence indicates that:1) The drive mechanism between CPI and PPI is bidirectional, in other words, the positive price drive from PPI to CPI and the reversed price drive from CPI to PPI both exist. Besides, lag in the drive mechanism is particularly evident. 2) There are different effecting paths of the drive mechanism between CPI and PPI:The effecting paths from CPI to PPI are consist of "FCPI→PPI" and "CPI→MPPPI", while the effecting paths from PPI to CPI are consist of "PPI→NFCPI" and "CGPPI→CPI". 3) The causality between CPI and PPI appears to be time-varying. Indeed, The regimes when CPI drives PPI last longer than the regimes when PPI drives CPI, which suggests that compared with the stable drive mechanism from CPI to PPI, drive mechanism from PPI to CPI shows the characteristics of fluctuation. 4) Some special international events can have a great influence on the drive mechanism between China's CPI and PPI. For example, the international financial crisis in 2008 weakened the drive function between China's price.

Key words

CPI / PPI / classified price index / internal driving mechanism / nonlinear MSC model

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SUI Jianli , LI Yuerong. Internal driving mechanism between CPI and PPI on the view of regime switching causality. Systems Engineering - Theory & Practice, 2019, 39(4): 1001-1017 https://doi.org/10.12011/1000-6788-2018-1990-17

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Funding

National Natural Science Foundation of China (71573104); Major Projects of Key Research Institute in University (16JJD790014); Jilin University Young Scholar Leadership Program (2015FRLX15)
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