A dual perspective inflation analysis of China with large dimensional data: an application of large VARs model

Abstract

ABSTRACT The inflation rate was an important indicator for monitoring macroeconomic operations. In this study, we analysed the reasons for the divergence of consumer-side inflation (CPI) and production-side inflation (PPI) trends through large-dimensional data, so as to consider the impact of various macroeconomic factors on the inflation. From the perspective of the diversity of inflation rate formation mechanisms and model fitted performance, we used the large BVAR/large TVP-VAR models for analysis, considered the analysis capability and time-varying adaptability to large dimensional data. In view of the impulse response, we found that the impulse responses of CPI were relatively flat, and the responses of inflation were not exactly the same in both perspectives. The effects of various variables on the inflation in China were highly time-varying. In summary, the macro factors that led to significantly different responses and should be focused on energy prices, chemical prices, food prices, 7-day Inter Bank Offered Rate, narrow measure of money supply and the interaction between PPI and CPI. Accordingly, policymakers could develop more thoughtful and detailed scenarios from our findings. Moreover, the impulse response mechanism of each indicator to the inflation has validated the applicability of large dimensional analysis in macroeconomic studies.