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Price Rigidity in China: Empirical Results at Home and Abroad

Chong, Terence Tai Leung and Wu, Zhang (2018): Price Rigidity in China: Empirical Results at Home and Abroad.

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Abstract

This paper explores the price rigidity in China using 259 monthly domestic and foreign macroeconomic time series. A factor-augmented vector autoregressive (FAVAR) model expanded with global components is employed. Four findings are obtained. First, the model shows that disaggregated price indices are volatile but not necessarily stickier than aggregate price series, and the inflation triggered by global and domestic components is massive and persistent. Second, although the global components have minimal effects on price volatility, they have a growing contribution to volatility. Moreover, they are a major force of the price persistence in China. Third, no clear evidence shows that the price stickiness in China is subject to urban-rural disparities. Last, we observe a relatively active price volatility and high persistence after the 2008 financial crisis, in which domestic components have increasingly significant impacts.

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