The relative price of investment goods, the price level, and the "slope puzzle"
Sen Zhang (),
Yangyang Ji and
No 609, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics
The application of Blanchard and Quah's (1989) method to Chinese data always obtains counterintuitive responses of output and the price level to demand and supply shocks, referred to in the literature as the "slope puzzle." Empirical findings of this paper reveal that the low-frequency movement in the price level causes this puzzle, which arises from the relative price of investment goods, and the friction in China's financial market drives this movement.
Pages: 11 pages
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