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Distinctive Characteristics of the Causality between the PPI and CPI: Evidence from Romania

Khalid Khan, Chi-Wei Su, Nicoleta - Claudia Moldovan () and Xiong De-Ping ()
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Khalid Khan: School of Finance, Qilu University of Technology and School of Economics, Ocean University of China
Chi-Wei Su: Department of Finance, Ocean University of China
Nicoleta - Claudia Moldovan: Department of Finance, West University of Timisoara
Xiong De-Ping: School of Finance, Yunnan University of Finance and Economics

ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, 2017, vol. 51, issue 2, 103-123

Abstract: This paper examines the causal relationship between the producer price index (PPI) and consumer price index (CPI) in Romania. The Granger full sample test shows unidirectional causality from PPI to CPI. The parameter stability test shows instability in the short run and the result is inappropriate for estimation due to the presence of structural changes. The Sub-sample rolling window test is used to address the time-varying, and it provides bi-directional causality at different sub-sample. The finding does not support the neoclassical profit-maximizing model, which states that PPI is not a single factor of fluctuation in CPI for Romania. It indicates the bidirectional relationship between the PPI and CPI, suggests that both these price indices play a significant role. The study implies policy-wise that PPI is a major factor in the price stability and should have been included in inflation targeting policy to curb the inflation in Romania.

Keywords: Consumer Price Index; Producer Price Index; Rolling Window; Time-varying Causality; Bootstrap. (search for similar items in EconPapers)
JEL-codes: C32 E31 (search for similar items in EconPapers)
Date: 2017
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