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Pass-through Effects of Global Commodity Prices on China's Inflation: An Empirical Investigation

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  • Ligang Liu
  • Andrew Tsang

Abstract

The present paper uses a two-step approach to estimate the pass-through effects of changes in international commodity prices and the RMB exchange rate on domestic consumer price inflation in China. We first estimate the pass-through effects of international commodity prices on producer prices and then estimate the pass-through effects of producer price inflation on consumer price inflation. We find that a 10-percent increase in international commodity prices would lead to China's producer prices increasing by 1.2 percent 3 months later, which in turn would increase China's domestic inflation by 0.24 percent over the same period. However, a 10-percent appreciation of the RMB exchange rate against the US dollar would help to reduce increases in producer prices by 4.4 percent over the following 3 months, which in turn would lead to a 0.89-percent decline in consumer price inflation over the same period. Our findings suggest that appreciation of the RMB in an environment of rising global commodity prices and a weak US dollar could be an effective instrument to help contain inflation in China. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Suggested Citation

  • Ligang Liu & Andrew Tsang, 2008. "Pass-through Effects of Global Commodity Prices on China's Inflation: An Empirical Investigation," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 22-34.
  • Handle: RePEc:bla:chinae:v:16:y:2008:i:6:p:22-34
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    References listed on IDEAS

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    1. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
    2. Li-gang Liu & Andrew Tsang, 2008. "Exchange Rate Pass-Through to Domestic Inflation in Hong Kong," Working Papers 0802, Hong Kong Monetary Authority.
    3. Goldberg, Linda S. & Campa, Jose M., 2006. "Distribution margins, imported inputs, and the insensitivity of the CPI to exchange rates," IESE Research Papers D/625, IESE Business School.
    4. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3-18.
    5. Li-gang Liu & Wenlang Zhang, 2007. "A New Keynesian Model for Analysing Monetary Policy in Mainland China," Working Papers 0718, Hong Kong Monetary Authority.
    6. Richard Podpiera, 2006. "Progress in China’s Banking Sector Reform; Has Bank Behavior Changed?," IMF Working Papers 06/71, International Monetary Fund.
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    Cited by:

    1. Chi Wei Su & Heng-Guo Zhang & Hsu-Ling Chang & Rui Nian, 2016. "Is exchange rate stability beneficial for stabilizing consumer prices in China?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(6), pages 857-879, September.
    2. Nagayasu, Jun, 2009. "Regional Inflation in China," MPRA Paper 24722, University Library of Munich, Germany.
    3. Al-Shawarby, Sherine & Selim, Hoda, 2012. "Are international food price spikes the source of Egypt's high inflation ?," Policy Research Working Paper Series 6177, The World Bank.

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