Business surveys and inflation forecasting in China

We use business survey data collected by the People’s Bank of China for inflation forecasting. Some survey indicators lead to enhanced forecasting performance relative to the univariate benchmark model, especially for a period of moderate inflation. However, the estimated models do not do a good job of tracking the recent pickup in Chinese inflation, due to increases in food prices.

Introduction: The stated objective of the Chinese central bank, the People’s Bank of China (PBoC), is to “maintain the stability of the value of the currency and thereby promote economic growth”.While there is still no formal inflation target, China includes an annual target for CPI growth among the country’s annual targets for social and economic development (see e.g. PBoC 2005). Moreover, for a transition economy where a major share of public wealth is held in cash or stored in bank accounts, price stability is an important determinant of so-cial and economic stability. The literature is notably sparse on forecasting inflation in China. Mehrotra and Sánchez-Fung (2008) consider 15 different models for forecasting Chinese inflation, and find that only those summarizing information from a large dataset by principal components beat the univariate benchmark.

Author: Juuso Kaaresvirta,Aaron Mehrotra

Source: Institute for Economies in Transition, Bank of Finland

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