Price instability and inflation: empirical evidence from the People's Republic of China

Abstract

The relationship between price instability and inflation is re-examined using the data for the People's Republic of China over the period 1953–91. The empirical results indicate that Friedman's conjecture of positive relationship between price instability and inflation is valid in China, where the economic system is quite different from those in market-oriented economy countries. Such a validation implies that higher inflation in China is unfavourable as it causes higher price instability that will reduce the efficiency of price system in allocating resource, hinder economic growth and could even result in economic disorder. This also suggests that a consistent and stable anti-inflation policy that reduces price instability would be preferable in China.