Effect of International Commodity Prices,Monetary Policy,and Its Uncertainty on Macro Price Divergence:From the Perspective of PPI Overshooting to CPI
For a long time,macro price stability has been one of the core objectives of central banks'monetary policy regulation.Among them,the correlation between CPI and PPI is particularly important.Theoretically,the fluctuations be-tween the two are synchronized.In recent years,China has encountered the phenomenon where the fluctuation of PPI signifi-cantly surpassed that of CPI during the same period,leading to widespread attention and discussions.However,limited stud-ies place international commodity prices and monetary policy within a unified theoretical framework to investigate their effects on China's macro price divergence.Therefore,by constructing a mathematical model,employing a time-varying empirical method,and analyzing the mediating effect,this paper attempts to explore the impact of international commodity prices,mon-etary policy,and its uncertainty on macro price divergence in China from the perspectives of arbitrage and overshooting.In the context of commodity financialization,the financial attributes of upstream industrial raw materials are strength-ened.Manufacturers can invest their funds into them,whose profit contains expected price changes and the net convenience yield.Alternatively,they can also invest in risk-free treasury bonds to earn interest.The market reaches an equilibrium when the returns of the above two channels are equal.Under this assumption,when international commodity prices rise,up-stream manufacturers feel supply pressures and are more likely to stockpile industrial raw materials,leading to an upward overshooting of PPI to CPI.When the money supply expands,trading in the upstream market tends to increase in fre-quency.The convenience yield of holding industrial raw materials rises,leading to increased demands by manufacturers.This results in an upward overshooting of PPI to CPI.When interest rates rise,manufacturers'willingness to invest in trea-sury bonds strengthens.Conversely,their desire to invest in production weakens,leading to a decrease in the frequency of transactions in the upstream market.This means that the convenience yield of holding industrial raw materials decreases,leading to reduced demands for these raw materials,resulting in a downward overshooting of PPI to CPI.When facing a ris-ing shock of monetary policy uncertainty,higher risk premiums weaken manufacturers'speculative willingness,resulting in a downward overshooting of PPI to CPI.In the empirical section,this paper incorporates more than 150 domestic and international macroeconomic variables into a TVP-FAVAR model.The results corroborate the conclusions drawn from the theoretical model.Additionally,this paper finds that the effects of international commodity prices and monetary policy uncertainty on macro price divergence are short-lived,whereas the recovery time for macro price divergence under the impact of two types of monetary policies is relatively longer.Furthermore,this paper investigates the mediating effect of convenience yield when holding industrial raw materials.It is found that the convenience yield has a mediating role in the process where two types of monetary poli-cies affect the divergence of macro prices.The potential innovations of this paper mainly include the following four aspects.Firstly,this paper constructs a theoretical model of PPI overshooting to CPI in the upstream production sector,and analyzes the theoretical mechanisms of the impact of international commodity prices and monetary policy on macro price divergence.Secondly,this paper em-ploys a TVP-FAVAR model for empirical research.Compared with other macroeconomic models,this model is more suitable for complex dynamic macroeconomic environments.Thirdly,this paper incorporates monetary policy uncertainty into the analytical framework,enhancing the study of the effect of monetary policy.Fourthly,this paper identifies the me-diating role of the convenience yield and validates it.This paper proposes the following policy recommendations.Firstly,it is essential to ensure the supply and stabilize the prices of commodities,mitigating the impact of price fluctuations on the supply side.Secondly,it is crucial to gain a deeper understanding of the impact of monetary policy changes on macro price fluctuations,thereby enhancing the effec-tiveness of monetary policy in stabilizing prices.Additionally,attention should be paid to the transparency and robustness of monetary policy formulation and implementation,preventing increased uncertainty caused by excessively frequent policy adjustments.Lastly,efforts should be made to improve the construction of the market economy system,ensuring a smooth macro price transmission mechanism along the upstream and downstream of the industry-consumption chain.
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