A Nonlinear Research on the Price Transmission Mechanism: Positive Price Transmission or Reversed Price Transmission?
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| Title | A Nonlinear Research on the Price Transmission Mechanism: Positive Price Transmission or Reversed Price Transmission?
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| Author | Yang Zihui , Zhao Yongliang and Liu Jianhua |
| Organization | Lingnan College, Sun Yat-sen University; College of Economics, Jinan University |
| Email | z_hyoung@yahoo.com.cn；ericjue@sohu.com；illow0703@163.com |
| Key Words | Reversed Price Transmission; Cost-Push Inflation; Demand-Pull Inflation; Nonlinear Granger Causality Test; Nonlinear Dynamic Analysis |
| Abstract | Using the more recently developed technique of a nonlinear Granger causality test by Diks and Panchenko (2006), this paper investigates the nonlinear transmission mechanism between the producer and the consumer prices, and then explores the evolutional trace of nonlinear transmission mechanism based on nonlinear dynamic analysis. Our results indicate that for the countries such as China there is a nonlinear causal relation from PPI to CPI, implying price increases at the early stages of production will lead to increases in consumer prices at the late stage and this will boost cost-push inflationary pressure and raise the risk of imported inflation in these countries. Our evidence based on nonlinear dynamic analysis indicates that reversed price transmission from the prices in the late stage to the prices in the early stage is more and more obvious, this will lead to a more complicated situation, and increase difficulty of macro-control and uncertainty in the economy's growth in China. This study also points out that since the transmission mechanism between CPI and PPI is not static, discretionary policies based on the dynamic transmission mechanism is preferable to simple rule policies of demand management or supply management. At last, we further point out that conclusions from traditional studies may be biased since they do not take account of the nonlinear character of price transmission mechanism. |
| Serial Number | WP319 |
| Time | 2012-08-06 |
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