Globalization and Changing Inflation Dynamics in China

Abstract

This article investigates the changing impact of economic globalization on inflation in China over the post-reform era. We construct an inflation dynamics model with globalization factors from microeconomic foundations. Empirical results with quarterly data spanning from 1984 to 2012 show that in 1994 there was a significant structural change in the inflation dynamics model, after which China’s inflation responded more significantly to foreign economic slack while the slope of the inflation-domestic slack relation reduced substantively.

KEY WORDS:

• globalization
• inflation
• NKPC
• inflation dynamics

Acknowledgment

We thank Guanliang Tong for excellent research assistance.

Notes

1. Economic globalization is measured as the sum of exports and imports in percent of nominal GDP.

2. China’s top eighteen major trading partners include Australia, Canada, France, Germany, Hong Kong, Indonesia, Italy, Japan, Korea, Malaysia, Netherlands, Russia, Singapore, Thailand, Taiwan, United Kingdom, United States, and Latin America. Note that the trade data for Latin America aggregates the corresponding data of Argentina, Brazil, and Chile. The trade data and real GDP series for the eighteen countries/regions were obtained from the CEIC database.

3. It may be noted that the estimates of the standard errors are likely to be inflated when the convex restriction is imposed so that it is unsurprising for the significance of the corresponding statistics to be less striking.

Additional information

Funding

This research is supported by the National Natural Science Foundation of China (No. 71173224).