Inflation dynamics and its driving factors in China: From the open dual economy perspective.

As an open economy, China also has a typical dual economy. These two economic characteristics may affect China's inflation in the following three aspects: First, the prices of imported intermediate goods might influence firms' costs. Second, the modes of pricing for food and non-food might be of a great difference as a result of the conduct of most agricultural product prices by government (that is, the market of agricultural products has not been released). Third, the transfer of rural labor force may change the urban labor market balance, and then affect firms' costs. In contrast to previous work, this paper models China's inflation using new Keynesian Phillips curve considering the above three factors and monetary policy shocks. Empirical results show that forward-looking behavior is predominant (accounting for about 2/3 of firms) in non-food sector, and that non-food prices are fixed for about three quarters on average. Real marginal costs including dual economy and open economy elements have a significant impact on inflation dynamics. The transfer of rural labor force also has a significant effect on inflation, but the directly supply-side effect of monetary policy (measured by interest rate) on inflation is insignificant. [ABSTRACT FROM AUTHOR]