Friday, 21 December 2007

Modelling Regional Inflation in China

Apologies for my recent lack of posts - sometimes academic life can result in lumpy work loads and reading 80,000 word PhDs takes considerable time even if they are related to China Economics.

This paper provides a good example of how academics are approaching the Chinese inflation issue. I have my doubts about the validity of this paper than comes out of the Bank of Finland although I am sure it is competently done.

"Modelling Inflation in China - A Regional Perspective"
ECB Working Paper No. 829
BOFIT Discussion Paper No. 19/2007

Contact: AARON N. MEHROTRA
Bank of Finland - Institute for Economies in
Transition (BOFIT), European University Institute -
Economics Department (ECO)
Email: aaron.mehrotra@bof.fi
Auth-Page: http://ssrn.com/author=355749

Co-Author: TUOMAS A. PELTONEN
European Central Bank (ECB)
Email: tuomas.peltonen@eui.eu
Auth-Page: http://ssrn.com/author=355041

Co-Author: ALVARO SANTOS RIVERA
European Central Bank (ECB)
Email: alvaro.santosrivera@ecb.int
Auth-Page: http://ssrn.com/author=508522

Full Text: http://ssrn.com/abstract=1010629

ABSTRACT: We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forwardlooking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.

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