Is Chinese Inflation Imported?Researches Basing on the Data from 2006 to 2008

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Abstract. The international trade makes all economies affected by the international disturbances， so some scholars advocate that inflation occurred in any economies may be the imported inflation. The paper puts forward a distinct idea for studying the imported inflation. Basing on the data of inflation from 2006 to 2008 in China， the paper tests whether the chinese inflation is imported， and concludes that the changes in prices of steel， machine and electron and light industry products cause the changes in prices of import goods， and further changes of Chinese inflation rates. So the main reasons of Chinese inflation during 2006-2008 should not be regarded as imported.

Key words： imported inflation， accumulative effect

1 Introduction

There are two completely different views about the reasons of inflation in academe. Monetarism considers the inflation only as a monetary phenomenon and affirms that the only reason of inflation in a country is the over issue of the fiat money. However， another view considers that the import prices can induce domestic prices， so economic globalization and international trade make the inflation in a country influenced by the globalization and international trade， the reason of inflation lays not in international facts and call the inflation imported one .

Since 2006， China experienced serious inflation， and some scholars advanced the inflation in China was imported . If the inflation in China during the period was imported one， then whether the strategy through which the central bank wants to control the inflation is effective is doubtful. So it is significant to understand that whether reason of inflation experienced in Chine is imported one.

2 LITERATUREREVIEWS

Since 1980s， with the development of international trade， the inflation in individual country had turned out to be the trend of reducing generally. Some economists think there must be certain relationships between these two phenomena， and began to pay attention to influence of international trade and globalization on the inflation. For instance， Fischer （2005） propounded that the inflation experienced by a country not only relied on the output of own country， but also the output gap of the trade partner. Thus， the inflation should be the imported. However， British famous magazine The Economist （2005） propounded that gradually increasing international trade made the traditional economic model of inflation being ridiculed， because it neglected the economic globalization. Some scholars even thought the economic globalization can not only be used to explain the reasons of the inflation， but also all the economic phenomena. For example， Greenspan （2005） propounded that the globalization will be the basis factor to explain any economic affairs during the past ten years.

As for the reason why inflation is imported， many investigators have given out different explains from different points of view. For instance， Modigliani and Papademos（1976）， Tobin（1975）and Cagan（1980） thought that the unreasonable monetary policy in a country leaded the inflation to be imported. When the international factors lead the domestic prices going up， the economic organizations in the country will ask for the central bank to increase the currency supply， in order to obtain the outer factor leads to inflation. This saying is similar to conversely forced theory in China. However， Rogoff（2006） thinks， global competition makes the wage and price level more flexible， which makes the Philips Curve steeper， and the fixed output increasing will lead to higher inflation. Ball and Mankiw（1995）explained as follows that comparing with domestic country， if the relative price is extremely bigger in the foreign countries， the price changes will effect more to the inflation for the domestic country. According to their study， the reason why gas can be a most important international factor to effect the inflation is that gas may bring the great change of the relative pricing annually.

However， for the question whether the inflation is imported， several scholars have propounded different opinions. The monetarists think that the inflation is always monetary phenomenon whenever and wherever. The unique reason of inflation is over issue of currency， not the foreign factor. Mundell（1961）suggested that if every country carried out the floating exchange rate system， then the foreign economic impacts will be shielded by the exchange rate floating. Thus， according to Mundell’s study， imported inflation was impossible. Studying from experimental view， Laurence （2006） concluded that international trade does not affect inflation level and dynamic structure in long term， and neither negatively affect to the inflation. That is to say， international factors have no effect to the inflation in individual country. Facing the conclusions of Rogoff（2006）， Yellen（2006） had found that USA and other countries’ Philips Curve had exactly affected by the international factor， not becoming stepper， but flatter. That is to say， certain output increase leads to the less inflationary effect. Ihrig et al （2006） had doubted the importing style inflation from the practical view. Their research found that if relaxing the assumption， the inflation effect caused by the outer gap of output will disappear in most countries.

As for the question whether the inflation is imported， there are also a couple of eclectics. They do not argue if the inflation is imported or not from the theory views， but scale the international factors influence on the inflation. They think that under economic globalization today， it’s really hard to imagine that one country’s economy can shield the impacts from the international factor. But if the inflation caused by the international factor is not so big， we can not say the inflation is imported one. Thus， the key point is not whether the inflation of the country is affected by the international factor， but the effected degree. For example， Weintraub（1976）research found that import price has explained why USA consuming price rise by 44% from the year 1943-1944；Levy（1978）research found that， from the late year 1971-1974，almost 60% inflation in the USA due to the impacts of international factor. And Yellen（2006）research found that globalization affects is only gentle， and Kohn（2006） research found that the globalization affects to the individual country’s inflation is generally limited.

As for the question whether the inflation is imported， although currently the researches are different， there would be one key point to be the same， that is to say， the researches have put the inflation rate regressed by domestic total requirement and importing price change rate， and use importing price to express the impact of international factor， in order to measure if the inflation is importing style， for instance， Weintraub（1976），Levy（1978），Yellen（2006）and Kohn（2006），their researches are also the same.

3 THOUGHTS OF THIS PAPER

If we consider the country individually， the changes in import prices exactly affect the domestic inflation， and finally get the conclusion that the inflation is imported. However， when we consider the matters using the connection view， the things will be totally different. During the international trade， while domestic import prices are the foreign country’s export prices， and domestic export prices are foreign country’s import prices. If the domestic price level affects by the foreign import prices， then the foreign price levels are also affected by the export prices. The increase in domestic export prices has increased the foreign country’s import prices， and which will transfer to the foreign the price level. That is to say， there would be some feedback relationship between domestic export prices and foreign importing price. Thus， Weintraub（1976）and Levy（1978）had figured out that in the USA during the certain period of inflation， the effect caused by international factor is approaching around 50%， and had concluded that the inflation is importing style. Their conclusion is acceptable. But Yellen（2006）and Kohn（2006） believed that since the effect is not so outstanding， the inflation is not the importing style， which will be questionable. When we consider the feedback relationship， the initial small pricing change will lead to huge accumulative effects. Thus， we have to distinguish the price accumulative effects to judge whether the inflation is imported one.

Besides， it is doubtful to allege the inflation to be imported one only basing the fact that the changes in foreign import prices induce the changes in domestic inflation. While considering the price feedback effects， the key reasons which lead the domestic country inflation are the increase in domestic country export price， not the import prices. Since there would be recycled relationship among domestic country inflation， domestic exporting price and foreign exporting price， then， even we prove like Weintraub（1976） and Levy （1978）， the foreign export prices explain the mostly domestic inflation， we can not assert that the inflation is importing style， because the reason why domestic inflation importing price change may initially come from the domestic exporting prices， not the foreign country’s.

Therefore， in order to distinguish if our country’s inflation is importing style， we have to check the following three points： 1st， the price accumulation effects between our country and main trade partners； 2nd， the granger relationship between our country’s exporting and importing price； 3rd， the relationship between domestic importing price and inflation. If the inflation is importing style， the inspection results should meet the following requirements： 1st，the price accumulation effect is outstanding；2nd，the domestic exporting price is not the reason which leads the foreign exporting price change； 3rd，domestic importing price is the reason which cause the domestic inflation. If meets these 3 requirements， it shows that the domestic inflation is caused by foreign exporting price change， and foreign exporting price change has nothing to do with domestic， thus， the inflation is importing style.

4 STATISTIC MEANS OF ACCUMULATIVE EFFECT

We suppose that the price of output of country at the time is which could be function of value increment and prices of input coming from all other countries. Let denotes the right of input of country coming from country . So denotes the right of input of country coming from country . We consider three-season lags of influence of input prices. The influence of current and previous two periods can be defined as 、 、 . Then for the country ， output price is ：

As to the influence of import prices on domestic prices， we calculate it through tow steps. The first we calculate the initial influence of changes in import prices on domestic prices through calculating the increase in domestic cost caused by changes in import prices. Second， for every country， the given initial changes in prices， the influence of import prices on inflation of all countries is decided by equation （1）. We can solve equation （1） by recursive means.

For simplicity， we can use matrix to express. Because the key purpose of this paper is to test the influence of import prices on domestic prices， we can suppose value increment is constant. The lagged influence of import prices form a set of triangle matrix， in which key diagonal of matrix is ， ，…， ， and the other elements equal to zero. By the same means， we can get the key diagonal of matrix and . The matrix of right of input coming from foreign trade partners is . The prices of output form a vector ， and the equation expressed by matrix is：

The initial influence of changes in prices of imported goods （ ） on output prices of every country can be expressed by the vector . To integrate all these effects， we add into equation （2）， and get following equation through solving：

is identity matrix. By averaging the changes in prices of all countries， we can get total changes in prices . Through adding into final demand， we get：

The accumulative effect of changes in prices is：

The initial changes in prices of input can be expressed as：

Because of ， we get：

We suppose that the ratios of imported goods in all input of all countries are equal， and all s are equal， then the accumulative effect is：

With increasing of the degree that a country participates in international trade ， approaches to 1. So even is very small， and the accumulative effect maybe much big， because 1- approaches to 0。

5 data AND THE EXPERIENTIAL REAULTS

5.1 Estimation of Price Accumulative Effect

The purpose of estimation of price accumulative effect is to find whether the export and import prices between two countries in trade have accumulative effect and the magnitude of accumulative effect. We select America， EU and Japan as the Chinese trade objects and test the accumulative effects. The sample period continued from the first season of 2006 to the third season of 2008. We suppose the price index in the first season of 2006 to be 100， and convert the other price index basing on this. In order to enlarge the number of the sample， we transform the season data into month data . The imported goods we select include petroleum products， mine products， machine and electron products， light industry products and agriculture products. For the same products， the imported price and amount are completely different among the different countries， so we get this imported price by adding right average. And the right is ratio of imported amount of specific goods in the total amount of the goods：

（4） If we consider separately the accumulative effects of Chinese iron， machine and electron and light industry products， the accumulative effect achieve 46 percent（sum of accumulative effect of iron， machine and electron and light industry products in table 3）. That is to say among the 60.2 percent accumulative effect in China， the granger causality of 46.9 percent changes in prices lay in Chinese export price. So we can not conclude that Chinese inflation during that period is imported.

In a word， the reason of Chinese inflation in 2006 is the over issue of money not the imported good prices.

References

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