Macroeconomic Component and Idiosyncratic Shock of China’s CPI Index
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| Title | Macroeconomic Component and Idiosyncratic Shock of China’s CPI Index
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| Author | Wang Shaoping and Zhu Manzhou |
| Organization | School of Economics, Huazhong University of Science and Technology |
| Email | wangspi@sina.com，zhumanzhou@126.com |
| Key Words | Inflation; Macroeconomic Component; Monetary Policy; Factor-augmented Vector Autoregressive |
| Abstract | This paper extracts a few common factors from a large macroeconomic information set, and establishes a factor-augmented vector autoregressive model (FAVAR). We decompose the fluctuations of both aggregated and disaggregated monthly inflation series into macroeconomic components and idiosyncratic shocks. It turns out that macroeconomic factors account for 57% of the variance of the 81 monthly time series in the full dataset, but only 39% of the variance of M2. The macroeconomic component and its mean’s ratio to the mean of inflation rate itself reflects the properties and sources of inflation in different time periods. This ratio is 118% between July 2008 and June 2009, which shows that the financial crisis leads to an overall decline in demand and then deflation, and 47% around 2005, implying the coordination between the macroeconomic component and monetary policy. However, the coordination needs to be improved during the inflation and deflation periods. Estimated impulse responses show that inflation rate reverts to the initial value after two or three months following the idiosyncratic shock, while macroeconomic shocks have different and permanent effects (about 2 years) on inflation rate. Therefore, the policies of depressing the inflation with respect to the macroeconomic component of inflation would effectively reduces the volatility of Chinese economy, hence the policies for controlling inflation should be designed specific to the corresponding macroeconomic factors. |
| Serial Number | WP318 |
| Time | 2012-08-06 |
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