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Modelling Inflation in China - A Regional Perspective

41 Pages Posted: 29 Aug 2007 Last revised: 10 Jan 2009

Aaron N. Mehrotra

Bank for International Settlements (BIS)

Tuomas A. Peltonen

European Central Bank (ECB)

Alvaro Santos Rivera

European Central Bank (ECB)

Date Written: November 1, 2007

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.

Keywords: China, inflation, regional, New Keynesian Philips Curve, GMM

JEL Classification: E31, C22

Suggested Citation

Mehrotra, Aaron N. and Peltonen, Tuomas A. and Santos Rivera, Alvaro, Modelling Inflation in China - A Regional Perspective (November 1, 2007). BOFIT Discussion Paper No. 19/2007; ECB Working Paper No. 829. Available at SSRN: https://ssrn.com/abstract=1010629 or http://dx.doi.org/10.2139/ssrn.1010629

Aaron N. Mehrotra (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alvaro Santos Rivera

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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