A Panel Smooth Transition Approach to Inflation and Relative Price Variability in China

12 Pages Posted: 29 Jan 2016

See all articles by Biao Gu

Biao Gu

Shanghai University - School of Economics

Jianfeng Wang

Mansfield University of Pennsylvania

Yi David Wang

University of International Business and Economics (UIBE) - School of Banking and Finance

Date Written: February 2016

Abstract

This paper examines the relationship between inflation and relative price variability (RPV) by using provincial level data from China. The data contains three different inflation regimes and evidence of smooth transition is statistically prominent and the province‐specific time‐varying marginal impact of inflation on RPV varies substantially across inflation regimes. The inflation-RPV linkage is stronger when inflation is moderately high, but tends to fade out and might eventually disappear when inflation is steadily low. The policy implication of this result is that inflation targets should be set within a range in which the inflation-RPV link is the weakest (i.e. low‐inflation regime) to minimize undesirable price dispersion induced by inflation.

Suggested Citation

Gu, Biao and Wang, Jianfeng and Wang, Yi David, A Panel Smooth Transition Approach to Inflation and Relative Price Variability in China (February 2016). Review of Development Economics, Vol. 20, Issue 1, pp. 62-73, 2016, Available at SSRN: https://ssrn.com/abstract=2724302 or http://dx.doi.org/10.1111/rode.12226

Biao Gu (Contact Author)

Shanghai University - School of Economics ( email )

China

Jianfeng Wang

Mansfield University of Pennsylvania ( email )

Yi David Wang

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

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