This paper employs the recently developed structural stability tests with unknown break point and... more This paper employs the recently developed structural stability tests with unknown break point and two median unbiased estimation methods to model China inflation persistence over the most recent quarter of a century. Our empirical results suggest that the persistence of both consumer price inflation and retail price inflation has witnessed declines over the most recent period of low inflation, with the reduction in consumer price inflation being more pronounced. The reduced inflation persistence helps to explain the remarkable phenomenon of high economic growth under the low inflation environment in China during the recent decade.
This paper employs the recently developed structural stability tests with unknown break point and... more This paper employs the recently developed structural stability tests with unknown break point and two median unbiased estimation methods to model China inflation persistence over the most recent quarter of a century. Our empirical results suggest that the persistence of both consumer price inflation and retail price inflation has witnessed declines over the most recent period of low inflation, with the reduction in consumer price inflation being more pronounced. The reduced inflation persistence helps to explain the remarkable phenomenon of high economic growth under the low inflation environment in China during the recent decade.
This paper evaluates the empirical validity of the New Keynesian Phillips Curve (NKPC) model of r... more This paper evaluates the empirical validity of the New Keynesian Phillips Curve (NKPC) model of rational expectations. We employ an instrumental variable (IV) projection method to approximate inflation expectations, and show that the inference based on this approach can differ significantly from the one based on rational expectations. More importantly, using an IV test for serial correlation in the GMM context, we find that the error term in the stylized NKPC model is significantly serially correlated. To compensate for the serial correlation problem, we propose an extended framework which can be easily rationalized in terms of sticky price setting of backward-looking firms. Empirical results show that further lags of inflation are needed in the hybrid specification of the NKPC in order to rule out serial correlation in the Euler equation.
This paper employs the recently developed structural stability test with multiple regime shifts a... more This paper employs the recently developed structural stability test with multiple regime shifts and grid bootstrapping methods to model US inflation dynamics over the past half century. Our empirical results suggest that the persistence of inflation has witnessed significant declines over the most recent period of low inflation and this helps to embed a low inflation environment. The finding is
Inflation in China has been remarkably stable during the last decade, a dramatic shift from the p... more Inflation in China has been remarkably stable during the last decade, a dramatic shift from the pattern seen in the prior two decades, and so questions arise as to whether inflation dynamics has also changed, and if so, what has caused the change and what are the policy implications? This paper explores these important questions and finds that the persistence of inflation dynamics in China experienced a significant reduction in the late 1990s. By using counterfactual simulations we show that systematic monetary policy change is the main contribution to the observed structural change. Our result implies that although inflation is less persistent and hence less responsive than it used to be to shocks, monetary authorities must be vigilant in monitoring potential inflation rise and to take preemptive action to anchor inflation expectations against any indication that they may rise in the coming periods.
This paper employs the recently developed structural stability tests with unknown break point and... more This paper employs the recently developed structural stability tests with unknown break point and two median unbiased estimation methods to model China inflation persistence over the most recent quarter of a century. Our empirical results suggest that the persistence of both consumer price inflation and retail price inflation has witnessed declines over the most recent period of low inflation, with the reduction in consumer price inflation being more pronounced. The reduced inflation persistence helps to explain the remarkable phenomenon of high economic growth under the low inflation environment in China during the recent decade.
This paper employs the recently developed structural stability tests with unknown break point and... more This paper employs the recently developed structural stability tests with unknown break point and two median unbiased estimation methods to model China inflation persistence over the most recent quarter of a century. Our empirical results suggest that the persistence of both consumer price inflation and retail price inflation has witnessed declines over the most recent period of low inflation, with the reduction in consumer price inflation being more pronounced. The reduced inflation persistence helps to explain the remarkable phenomenon of high economic growth under the low inflation environment in China during the recent decade.
This paper evaluates the empirical validity of the New Keynesian Phillips Curve (NKPC) model of r... more This paper evaluates the empirical validity of the New Keynesian Phillips Curve (NKPC) model of rational expectations. We employ an instrumental variable (IV) projection method to approximate inflation expectations, and show that the inference based on this approach can differ significantly from the one based on rational expectations. More importantly, using an IV test for serial correlation in the GMM context, we find that the error term in the stylized NKPC model is significantly serially correlated. To compensate for the serial correlation problem, we propose an extended framework which can be easily rationalized in terms of sticky price setting of backward-looking firms. Empirical results show that further lags of inflation are needed in the hybrid specification of the NKPC in order to rule out serial correlation in the Euler equation.
This paper employs the recently developed structural stability test with multiple regime shifts a... more This paper employs the recently developed structural stability test with multiple regime shifts and grid bootstrapping methods to model US inflation dynamics over the past half century. Our empirical results suggest that the persistence of inflation has witnessed significant declines over the most recent period of low inflation and this helps to embed a low inflation environment. The finding is
Inflation in China has been remarkably stable during the last decade, a dramatic shift from the p... more Inflation in China has been remarkably stable during the last decade, a dramatic shift from the pattern seen in the prior two decades, and so questions arise as to whether inflation dynamics has also changed, and if so, what has caused the change and what are the policy implications? This paper explores these important questions and finds that the persistence of inflation dynamics in China experienced a significant reduction in the late 1990s. By using counterfactual simulations we show that systematic monetary policy change is the main contribution to the observed structural change. Our result implies that although inflation is less persistent and hence less responsive than it used to be to shocks, monetary authorities must be vigilant in monitoring potential inflation rise and to take preemptive action to anchor inflation expectations against any indication that they may rise in the coming periods.
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