Time-varying effects of international copper price shocks on China's producer price index

Abstract

As China becomes the largest international copper importer, we hypothesize that international copper price shocks affect China's producer price index (PPI). To test the hypothesis, we rely on a time-varying parameter structural vector autoregression with stochastic volatility (TVP-SVAR-SV) model to analyze the impact of the copper price shock, which is categorized into copper supply shock, aggregate demand shock and copper-specific demand shock. Our results indicate that the impact of international copper price shocks on China's PPI is time-varying. Copper price shocks significantly affect China's PPI over the short and medium terms and the aggregate demand shock displays the most. Also, copper price shocks show greater impact on the production materials PPI than on the living materials PPI.