Developing an Underlying Inflation Gauge for China

47 Pages Posted: 8 May 2018 Last revised: 10 May 2018

See all articles by Marlene Amstad

Marlene Amstad

The Chinese University of Hong Kong, Shenzhen

Ye Huan

The People's Bank of China (PBC)

Guonan Ma

Bruegel

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2018

Abstract

Inflation in emerging markets is often driven by large, persistent changes in food and energy prices. Core inflation measures that neglect or under-weight volatile CPI subcomponents such as food and energy risk excluding information helpful in assessing current and future inflation trends. This paper develops an underlying inflation gauge (UIG) for China, extracting the persistent part of the common component in a broad dataset of price and non-price variables. Our proposed UIG for China avoids the excess volatility reduction that plagues traditional Chinese core inflation measures. When forecasting headline CPI, the proposed UIG outperforms traditional core inflation measures over a variety of samples.

Keywords: inflation, China, emerging markets, forecasting, monetary policy, dynamic factor models

JEL Classification: C13, C33, E31, E37, G15, C43

Suggested Citation

Amstad, Marlene and Huan, Ye and Ma, Guonan, Developing an Underlying Inflation Gauge for China (April 27, 2018). BOFIT Discussion Paper No. 11/2018. Available at SSRN: https://ssrn.com/abstract=3175233

Marlene Amstad (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Ye Huan

The People's Bank of China (PBC)

No.32 Chengfang Street
Xi Cheng, Beijing 100800
China

Guonan Ma

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

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