AN INVESTIGATION INTO THE DYNAMIC RELATIONSHIP BETWEEN CPI AND PPI: EVIDENCE FROM THE UK, FRANCE AND GERMANY

Kai-Yin Woo, Shu-Kam Lee () and Cho-Yiu Joe Ng ()
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Kai-Yin Woo: Department of Economics and Finance, Hong Kong Shue Yan University, 10 Wai Tsui Crescent, Braemar Hill, North Point, Hong Kong SAR
Shu-Kam Lee: Department of Economics and Finance, Hong Kong Shue Yan University, 10 Wai Tsui Crescent, Braemar Hill, North Point, Hong Kong SAR
Cho-Yiu Joe Ng: #x2020;Department of Economics and Finance, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong SAR

The Singapore Economic Review (SER), 2019, vol. 64, issue 05, 1081-1100

Abstract: 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.

Keywords: Threshold cointegration; MTAR adjustment; Granger causality; mean bias; unconditional half-life (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0217590818500261

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