Who influenced inflation persistence in China? A comparative analysis of the standard CIA model and CIA model with endogenous money

Abstract

In this paper, we examine the influencing factors of inflation persistence in China’s economy using the DSGE approach. Two monetary DSGE models are estimated, namely, a standard CIA model and a CIA model with a Taylor rule. This article uses the Bayesian method to estimate the model, and the estimated and inferred results are credible due to the Markov chain reaching convergence. The results show that the augmented model outperforms the standard CIA model in terms of capturing inflation persistence. Further studies show that inflation persistence mainly comes from the persistence of the money supply, while money supply uncertainty, the reaction coefficient of monetary growth to productivity, productivity persistence and productivity uncertainty have a smaller impact on inflation persistence. Changes of monetary policy have little effect on inflation persistence.