Measurement Of Inflation Inertia In The China And Monetary Policy Implications

Accordingly, the definition of inflation inertia refers to the tendency of inflation toconverge slowly towards its long-run value following a shock which has led inflationaway from its long-run value. The higher inflation inertia, the longer lag time neededto monetary policy. Over shorter horizons, however, various macroeconomic shocks,including in economic activity or production costs, will temporarily move inflationaway from the central bank’s inflation objective. Therefore, a profound understandingof the speed of inflation adjustment in response to such shocks is of crucialimportance for a central bank whose policy is oriented towards price stability. First,we measure the inertia in the change of the China CPI, using a structural time seriesmodel which explicitly models the various components driving inflation. Found thatboth of the intrinsic inflation inertia and extrinsic inflation inertia are really high,amount to0.9998and0.9990, the lag effect of monetary policy is significant. Second,in this paper, we conduct empirical analysis of the eight categories of pricesub-components and31major regions of China. Found that the inflation inertia ofeight categories has little contact with the proportion shared in the overall CPI, andthere are regional differences among31major regions. The implications for monetaryauthorities should give full consideration to the sub-sector, sub-region inflation inertia.This study brings innovation to the inflation dynamic, and scientific basis to monetarypolicy which making forward-looking decision, therefore has important practicalimplications.