An Empirical Analysis Of Nonlinear Causality Relationship Between PPI And CPI

Price is one of the key indicators of economic. Changes of price indices is considered as an important macroeconomic phenomena which attracted widespread attention. Analysis of the price conduction mechanism is conducive to curb inflation or achieve the goal of price stability. In this paper we analyzed the transmission mechanism between PPI and CPI from the perspective of nonlinear.Firstly, we use linear method to analyze conduction between PPI and CPI. Co-integration theory, error correction model, and Granger causality test are employed. We constructed two error correction models,including binary VEC and three variables VEC consider monetary supply factor.The empirical results show that, CPI is the Granger reason for PPI. However, even after taking currency supply factors into account, BDS test and nonlinear Granger test still can not reject the null hypothesis that "residual of VEC model still exist useful information".It implys that there exist significant nonlinear conduction between the PPI and CPI.Linear model can not fully reveal the transmission mechanism between the PPI and the CPI, particularly the nonlinear conduction relationship.To examine the causality from consumer to wholesale prices,this paper further developed multivariate Mackey-Glass model(MNMG). During our sample period, MNMG model showed better explanatory power than linear VEC model.MNMG model results show that there is relevant and two-way causality relationship between PPI and CPI,including linear and nonlinear conduction.And the impact of nonlinear onduction is greater than linear impact.Nonlinear and linear self-feedback effect plays an important role on prices conduction, even greater than the price conduction. Therefore our country is facing "cost-push" and "demand-pull" inflation.It increase the difficulty of price regulation and the risk of future inflation.With impulse response and numerical simulation based on MG model, the results indicating that CPI react to the pulse of PPI higher and longer than CPI on PPI. It implys that conduction effect from downstream to upstream is stronger and more smoothly.Meanwhile PPI and CPI is very sensitive to their own shock.The shocks have a positive promotion to themself reflecting the feedback effects of inflation is large.