TY - JOUR
T1 - AN INVESTIGATION INTO THE DYNAMIC RELATIONSHIP BETWEEN CPI AND PPI
T2 - EVIDENCE FROM THE UK, FRANCE AND GERMANY
AU - WOO, Kai-Yin
AU - LEE, Shu-Kam
AU - NG, Cho-Yiu Joe
PY - 2019/12
Y1 - 2019/12
N2 - This paper examines the dynamic relationship between the consumer price index (CPI) and the producer price index (PPI) in the UK, France and Germany from 1997 to 2013. We employ the momentum-threshold autoregressive (MTAR) cointegration model for empirical analysis. The results show that the CPI and the PPI are cointegrated with bi-directional long-run Granger causality between CPI and PPI, signifying the existence of both demand-pull and the cost-push nature of inflation. The estimates of threshold vector error correction models (TVECMs) indicate asymmetric adjustments to equilibrium, where upward adjustments are statistically significant but downward adjustments are sluggish and insignificant. Moreover, we generate the unconditional half-life estimates as a measure of persistence, which reveal robust evidence of complex non-linearities in the adjustment process. Our overall results provide valuable information for policymakers to formulate inflation-control policies and optimal policy horizons under a non-linear framework.
AB - This paper examines the dynamic relationship between the consumer price index (CPI) and the producer price index (PPI) in the UK, France and Germany from 1997 to 2013. We employ the momentum-threshold autoregressive (MTAR) cointegration model for empirical analysis. The results show that the CPI and the PPI are cointegrated with bi-directional long-run Granger causality between CPI and PPI, signifying the existence of both demand-pull and the cost-push nature of inflation. The estimates of threshold vector error correction models (TVECMs) indicate asymmetric adjustments to equilibrium, where upward adjustments are statistically significant but downward adjustments are sluggish and insignificant. Moreover, we generate the unconditional half-life estimates as a measure of persistence, which reveal robust evidence of complex non-linearities in the adjustment process. Our overall results provide valuable information for policymakers to formulate inflation-control policies and optimal policy horizons under a non-linear framework.
KW - Granger causality
KW - mean bias
KW - MTAR adjustment
KW - Threshold cointegration
KW - unconditional half-life
UR - http://www.scopus.com/inward/record.url?scp=85052594810&partnerID=8YFLogxK
UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-85052594810&origin=recordpage
U2 - 10.1142/S0217590818500261
DO - 10.1142/S0217590818500261
M3 - RGC 21 - Publication in refereed journal
SN - 0217-5908
VL - 64
SP - 1081
EP - 1100
JO - Singapore Economic Review
JF - Singapore Economic Review
IS - 5
ER -