Production Chain Length and PPICPIDivergence: Analysis Based on theGlobal Input-output Price Model

Ni Hongfu1,2, Yan Bingqian3*, Wu Liyuan4

1 School of Economics, University of the Chinese Academy of Social Sciences (UCASS), Beijing, China

2 Institute of Economic Research, Chinese Academy of Social Sciences (IE-CASS)

3 National Academy of Economic Strategy, CASS (NAES-CASS)

4 Institute of World Economics and Politics, CASS (IWEP-CASS)

Abstract: Productivity and international energy price shocks are reflected in PPI andCPI via industrial chains. China’s in-depth participation into the global value chains hasincreasingly lengthened its industrial production chains. The question is how the changinglength of production chains will affect CPI and PPI, as well as CPI-PPI correlation? Byconstructing a global input-output price model, this paper offers a theoretical discussion onthe impact of production chain length on the CPI-PPI divergence. Our findings suggest thatthe price shock of international bulk commodities has a greater impact on China’s PPI thanthat on CPI. The effects on both China’s PPI and CPI estimated by using the single-countryinput-output model are higher than the results estimated with the global input-output model.However, the difference between CPI and PPI variations estimated with the global inputoutputmodel is greater than the result estimated with the single-country input-output model,which supports the view that the lengthening of production chains, especially internationalproduction chains, leads to a divergence between CPI and PPI. Empirical results basedon cross-national panel data also suggest that the lengthening of production chains hasreduced the CPI-PPI correlation for countries, i.e. the lengthening of production chains hasincreased the PPI-CPI divergence. That is to say, policymakers should target not just CPIin maintaining price stability, but instead focus on the stability of both PPI and CPI. Effortscan be made to proactively adjust the price index system, and formulate the industrial chainprice index.

Keywords: Global value chains, length of production chains, consumer price index,

JEL Classification Code: C67

DOI: 10.19602/j.chinaeconomist.2024.05.04