PPI And CPI:Long-term Divergence And Monetary Policy Choice

PPI and CPI are important economic indicators for the central bank to judge the macroeconomic situation and conduct monetary policy,and have important reference value for the government to formulate economic policies.In theory,the change direction of the t.wo is roughly the same.However,the two have had a divergence of four years since October 2011,which conflicts with the traditional economic theory and brings serious challenges to the central bank to conduct monetary policy.This article adopts the method of combining theoretical and empirical analysis to study the transmission relationship between PPI and CPI before and after the long-term divergence,the cause of the long-term divergence,and how monetary policy should react to the fluctuations of PPI and CPI.In empirical analysis,through the analysis of the transmission relationship of aggregate price indices and classified price indices between PPI and CPI,this article investigates the transmission relationship between PPI and CPI in depth and preliminarily explains the long-term divergence between PPI and CPI after 2011.In theoretical modeling analysis,this article divides the production process into two stages of upstream industrial goods production and downstream consumer goods production,and sets up a two-stage production DSGE model to study further what caused the long-term divergence between PPI and CPI,how monetary policy should react to the fluctuations of PPI and CPI,and whether the monetary authority of China attaches great importance to PPI and reacts to its volatility.The results of theoretical and empirical analysis show that:(1)about the transmission mechanism between PPI and CPI in ChinaThe two-stage production DSGE model can fully describe the positive transmission mechanism of upstream industrial goods price to downstream consumer goods price and the reverse transmission mechanism of downstream consumer goods price to upstream industrial goods price,which is in line with the transmission and feedback mechanism of upstream and downstream commodity prices in the law of price transmission.From January 2001 to September 2011,there was positive long-term equilibrium relationship,and there existed long-term and short-term positive interactions between PPI and CPI,which is consistent with the theoretical expectations.From October 2011 to December 2015,the long-term divergence between PPI and CPI was mainly determined by the long-term reverse equilibrium relationship and error correction mechanism.(2)about the reasons for the long-term divergence between PPI and CPI in ChinaThe long-term divergence between PPI and CPI from October 2011 was caused by the sustained fall of production material price of PPI and the continued rising food price of CPI,so the divergence between the two was structural.The reasons for the long-term divergence between production material price of PPI and food price of CPI were as as follows.On the one hand,there was positive long-term equilibrium relationship,and there existed long-term and short-term positive interactions between commodity price and production material price of PPI,but there weren't long-term equilibrium relationship and significant short-term interactions between commodity price and life material price of PPI.The sustained fall of commodity price(i.e.,industrial production sector encountered negative shock of commodity price)from 2012 led to the sustained fall of production material price of PPI and PPI,thus resulting falling PPI and having some positive transmission effect on CPI,while the falling range of PPI was wider.On the other hand,the food sector encountered adverse supply shock which led to rising food prices,thus resulting rising CPI and having some reverse feedback effect on PPI,while the rising range of CPI was wider.The superposition of the two kinds of effects led to the continued rising CPI and falling PPI,thus resulting the long-term divergence between PPI and CPI(i.e.,the continued rising price gap of CPI and PPI).(3)about the inflation target of monetary policyThe results of monetary policy rule comparison show that compared to the monetary policy pegged to CPI,monetary policy pegged to PPI and CPI can reduce the volatility of CPI and PPI while increasing the volatility of the output of industrial and consumer goods sector,but the falling range of the standard deviation of inflation is about ten times as wide as the rising range of the standard deviation of output.That means,unless the weight of output volatility is far greater than that of inflation volatility in welfare loss function,namely,monetary authorities attach extreme importance to output stability,monetary policy should be simultaneously pegged to PPI and CPI.In addition,the result of Bayesian model comparison shows that the monetary authority in China focuses more on CPI instead of focusing on CPI and PPI simultaneously in terms of price stability.