From the General to the Specific: Modelling Inflation in China

Abstract

This article uses automatic model selection procedures, based on the general-to-specific approach, to investigate inflation in China. A novelty of this article is the use of a technique called impulse indicator saturation which allows us to uncover instabilities and to specify a very general model and select down to a more specific model that best explains inflation in China. By and large, our findings suggest that China has been able to insulate itself against shocks from the US, although (maybe surprisingly) monetary growth in Europe seems to have an effect. Nonetheless, the main factors impacting Chinese inflation appear to be domestic, namely GDP growth and money growth.