15Inflation in china

MPRAMunichPersonalRePEcArchiveRegionalInationinChinaNagayasu,JunDecember2009Onlineat:24RegionalIn‡ationinChinaJunNagayasuUniversityofTsukubaDec2009AbstractThispaperempiricallyexaminesdevelopmentsinpriceandin‡ationinChinafrom1991to2005.Unlikemostpreviousstudies,theirdeterminantswereinves-tigatedinthepaneldatacontext,andour…ndingsareasfollows.First,usingthepanelcointegrationmethod,wecon…rmalong-runrelationshipbetweenprice,moneyandoutput.Secondly,weprovideevidencethatin‡ationcanbeexplainedbyeconomicfundamentalssuchasmoney,credits,productivity,andexchangerategrowth.Furthermore,whileanincreasedconcernaboutregionaldiscrepanciesinrecentyears,thisrelationshipismoresensitivetothesampleperiodthantotheregiontype.Notably,moneydoesnotseemtobecloselyassociatedwithin‡ationoverrecentyears.JELclassi…cation:E310,E500,R110Keywords:China,in‡ation,paneldata,panelcointegrationMailingaddress:UniversityofTsukuba,DepartmentofSocialSystemsandManagement,1-1-1Tennodai,Ibaraki305-8573JAPAN.Email:[e-mail]perwaspresentedatthe83rdAnnualConferenceoftheWesternEconomicAssociationInter-national(Honolulu2008)andtheFallConferenceoftheJapaneseSocietyofMonetaryEconomics(Hiroshima2008).IwouldliketothankZipeiChenandYingShenfordatacollection.IalsothankforusefulcommentsGregoryGivens,AkihiroKubo,YingLiu,RobertJ.Sonora,QingYuanSui,YonghongTu,andconferenceparticipants.Thisresearchwaspartly…nancedbytheDataBankProjectatTsukubaUniversity.However,allerrorsremainmine.11IntroductionOverrecentyears,Chinahasexperiencedhigheconomicgrowthwithrelativelymod-eratein‡ationbyinternationalstandards.ItsannualGDPgrowthratehasoftenexceeded10percentwithapeakofaround35percentinthemid1990s.Becausemanydevelopedcountrieshaveexperiencedsloweconomicgrowthsince1990,Chinahasoftenbeenclaimedastheengineoftheworldeconomy.Figure1showstheChineseGDPgrowth(measuredinlocalcurrency),Chinesein‡ation,andworldaveragein‡ationratesfrom1991to2005.ThissuggeststhattheChinesein‡ationratewasgenerallylowerthanitsGDPgrowthandtheworldin‡ationrate,andactuallyexperiencedde‡ationinthesecondhalfofthe1990sandearly2000s.Thelowin‡ationrelativetoGDPisconsistentwithChina’smacroeconomicpolicysincethe…ve-yeareconomicplanoftenmakesreferencetothisasoneofitseconomictargets.Themoderatein‡ationratewasarguedasresultingfromseveralfactorsincludingastrongsupplysideowingtothecheaplaborforceandperiodicweakdemandforconsumergoods.1However,inthelastcoupleofyears,thesustainabilityofthiseconomicgrowthhasbeenbroughtintoquestionsincecheaplaborisnolongeravailable,andthereisconsiderableupwardpressureonwagesandin‡ation.Morerecently,considerablecon-structionforthe2008BeijingOlympicsaswellassoaringcommodity(e.g.,wheatandoil)pricesworldwidehavebecomeadditionalfactorscontributingtotheincreasedin-‡ationarypressure.Whiletheadversee¤ectsofthesub-primeloancrisishavebecameapparentworldwideinthesecondhalfof2008andsubduedin‡ationarypressure,itbegantoincreaseagaininChinain2009alongwithworldeconomicrecovery.In‡ationincreasesinChinahavemajorpolicyimplicationsforbothdomesticandinternationaleconomies.Amongstotherpossibilities,highin‡ationmayhaveadele-teriouse¤ectonfutureChineseeconomicgrowth,resultinginhigherwages,moreexpensiveexports,andfewerforeignreserves.Moreover,duetothehighvolumeofexportedgoods,moreexpensiveexportsfromChinamightincreasein‡ationoverseasalso.Thus,ithasbecomeapressingresearchtopicinmanycountries.Amongmanyothers,pertinentpreviousstudiesincludeHuang(1994),Girardin(1996),Chen(1997),Hasan(1999),GerlachandPeng(2006),Funke(2006),andBurdekinandSiklos(2006).Usingcountry-leveldata,Huang(1994)andChen(1997)con…rmedalong-runrelationshipinthestandardmoneydemandfunction,andHasan(1999)reportsacloserelationshipbetweenpriceandmoneysupply,andbetweenin‡ationandmonetarygrowth.Incontrast,Girardin(1996)raisesevidenceagainstcointegrationinthemoney(currency)demandfunction.Mehrotraetal(2007)isoneofafewexamplesofanalyzingregionalin‡ationinChina,butfocusesonin‡ationary1Yusuf(1994)summarizesChineseeconomicdevelopmentsandpolicyfrom1973to1993.2developmentsanddidnotanalyzepricelevels,i.e.,thelong-runimplicationsofpricemovements.2Finally,adjustingourfocustoamoreglobalcontext,evidenceisreportedofhowcheapChineseexports(i.e.,lowin‡ation)helpedachievelowerin‡ationinmanyim-portingcountriesduring1994to2003(KoyuncuandYilmaz2006)butoftheirlimitede¤ectonJapanandtheUS(FeyziogluandWillard2008).Againstthisbackground,thispaperempiricallyinvestigatesthedynamicsofChi-nesepriceandin‡ationusingregionaldata.Duetodataavailability,wefocusmainlyonthecreditsandexchangeratechannelsofthetransmissionmechanismofmonetarypolicy.3Useofregionaldatasetsthisstudyapartfrompreviousstudiesbasedoncountry-leveldata,andismotivatedbythefactthatin‡ationrates,ormoregenerallyeconomicdevelopments,arenotuniformacrosstheregionsinChina.4Furthermore,apaneldataanalysisallowsustocheckthesensitivityofourresultsobtainedfromfullsampleobservationstothesampleperiodandregionalgroups,whichwasimpos