A VAR Based Empirical Analysis Of The Effect Of International Commodity Futures Price On China’s CPI

With the implementation of opening up policy, China, a country with a huge demand of resources, is and will be influenced by the strike of international commodity price and hot money inevitably. Traditional analysis on close economies is no longer applicable to current economic affairs. Every year, China has to import a large amount of agricultural products and raw materials such as iron ore, crude oil, soybean and so on. Meanwhile, China exports lots of resources such as rare earth. Recent years, international commodity price fluctuates violently due to reasons such as economic cycle, which will affect China’s price level. Since the beginning of2014, RMB has depreciated sharply and will keep depreciating due to the announcement of expanding the RMB exchange rate floating range from China’s Central bank. It causes many economists to be anxious about imported inflation, which is closely related to the variation of international commodity price. As a leading indicator of international commodity price and macro-economy trend, international commodity futures price reflects much information of macro-economy and commodity price. Therefore, it is meaningful to study the effect of international commodity price on China’s CPI.This thesis first describes statistically the trend of international commodity futures price and China’s CPI, then analyses the transmission effect and channel of international commodity futures price on China’s CPI. Moreover, based on VAR model, this thesis adopts Granger causality, impulse response function and variance decomposition method to study the former effect as well as the transmission channel. Totally speaking, there are three channels:spot price channel, futures price channel and monetary channel.The theoretical and empirical results suggest:the variation of CPI is mainly affected by its previous values. From the perspective of transmission channels, the main channel is futures price channel, i.e. The CRBâ†'WENHUAâ†'CPI channel. It suggests that with the development of China’s commodity futures market, the linkage effect of international commodity futures and domestic commodity futures is more and more obvious. Meanwhile, the futures price plays an important role in guiding the price index, which shows the main function of futures—reflection of prices. The second channel is spot price channel, i.e. The CRBâ†'CPIâ†'CPI or the CRBâ†'CCPIâ†'PPIâ†'CPI channel. The final and weakest effect is monetary transmission channel, i.e. The CRB--M2--CPI channel.