香
港 樹 仁 大 學
Dynamic relationship between consumer and producer price
indexes: Evidence from the UK, France and Germany
Kai-yin WOO
Shu-kam LEE
Cho-yiu Joe NG
August 2015
Department of Economics and Finance
Hong Kong Shue Yan University
經濟及金融學系
Working Paper Series
Working Paper Series
August 2015
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The ISBN is: 978-988-16294-3-2
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Dynamic relationship between consumer and producer price indexes: Evidence
from the UK, France and Germany
Kai-yin WOO*
Department of Economics and Finance
Hong Kong Shue Yan University
10 Wai Tsui Crescent, Braemar Hill Road,
North Point, Hong Kong SAR
[email protected]
Shu-kam LEE
Department of Economics and Finance
Hong Kong Shue Yan University
10 Wai Tsui Crescent, Braemar Hill Road,
North Point, Hong Kong SAR
[email protected]
Cho-yiu Joe NG
Department of Economics and Finance,
City University of Hong Kong
Tat Chee Avenue, Kowloon Tong
Hong Kong SAR
[email protected]
*Corresponding author
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Abstract
This paper examines the dynamic relationship between the consumer price index (CPI)
and the producer price index (PPI) in the EU ‘Big Three’, namely the United
Kingdom (UK), France and Germany. We employ the momentum-threshold
autoregressive (MTAR) cointegration model for empirical analysis. Both ordinary
least squares (OLS) and generalised least squares (GLS) methods are used to
construct the MTAR tests under consistent-threshold estimation. The results show that
the CPI and the PPI are cointegrated with long-run and short-run Granger causality
between CPI and PPI, signifying the existence of demand-pull and the cost-push
nature of inflation. The estimates of threshold vector error correction models
(TVECMs) indicate asymmetric adjustment to equilibrium. The reversion to
equilibrium is faster when CPI inflation increases relative to PPI inflation than
otherwise in all of the countries under study, where anticompetitive behaviour may
exist in the input markets. Moreover, we generate the unconditional half-life estimates
as a measure of persistence, which reveal robust evidence of complex nonlinearities in
the adjustment process. Our overall results provide insight for researchers and
policymakers to address inflation-control policies in a nonlinear framework.
JEL: C12; C22; E31; O52
Keywords: momentum-TAR cointegration; generalised least squares; Granger
causality; mean bias; unconditional half-life
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Department of Economics and Finance
Hong Kong Shue Yan University
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