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Exploring the sources of inflation dynamics: New evidence from China

Author

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  • Chiang, Shu-Hen
  • Lee, Chien-Chiang
  • Liao, Ying

Abstract

The purpose of this paper is to introduce the idea of shift-share analysis, where local inflation is decomposed into the national factor, structural stickiness (with sectoral and regional aspects), and a localized pricing power effect in order to gain a better understanding of the inflation dynamics. We apply price-level data in China as a dual economy, which has historically been separated into urban and rural areas. The results show that sectoral differences in inflation are the most important factor explaining inflation in China, while local pricing power must be seriously considered in many sectors in rural areas.

Suggested Citation

  • Chiang, Shu-Hen & Lee, Chien-Chiang & Liao, Ying, 2021. "Exploring the sources of inflation dynamics: New evidence from China," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 313-332.
    • Handle: RePEc:eee:ecanpo:v:70:y:2021:i:c:p:313-332
    DOI: 10.1016/j.eap.2021.03.001
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    More about this item

    Keywords

    Inflation; Structural stickiness; Structural VAR; Rural–urban divide; Pricing power;
    All these keywords.

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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