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Economic Globalization and Inflation in China: A Multivariate Approach
Author(s) -
Zhang Chengsi,
Song Ke,
Wang Fang
Publication year - 2015
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/cwe.12115
Subject(s) - output gap , economics , globalization , inflation (cosmology) , china , monetary policy , variance decomposition of forecast errors , multivariate statistics , impulse response , macroeconomics , econometrics , inflation targeting , variance (accounting) , monetary economics , market economy , geography , mathematics , mathematical analysis , statistics , accounting , physics , archaeology , theoretical physics
This paper evaluates whether globalization has increased the role of global factors in driving inflation in China. Unlike other published studies on the relationship between globalization and inflation, which mostly use Phillips curve models, this paper uses multivariate dynamic models to examine the dynamic interactions between globalization and inflation in China. Empirical results with quarterly data spanning from 1995 to 2012 show that the global output gap significantly affects the dynamics of inflation in China. In particular, the global output gap is superior to the domestic output gap in predicting domestic inflation. Impulse response and variance decomposition analyses reinforce this finding. Our results indicate that the central bank of China should take developments in global output into account in its monetary policy‐making process.