Franses, Philip Hans

English

EUR Research Repository

Full Terms & Conditions of access and use can be found athttps://www.tandfonline.com/action/journalInformation?journalCode=rcej20China Economic JournalISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/rcej20Inflation in China, 1953-1978Philip Hans FransesTo cite this article: Philip Hans Franses (2020) Inflation in China, 1953-1978, China EconomicJournal, 13:3, 290-298, DOI: 10.1080/17538963.2019.1679329To link to this article:  https://doi.org/10.1080/17538963.2019.1679329© 2019 The Author(s). Published by InformaUK Limited, trading as Taylor & FrancisGroup.Published online: 16 Oct 2019.Submit your article to this journal Article views: 1219View related articles View Crossmark dataInflation in China, 1953-1978Philip Hans FransesErasmus School of Economics, Econometric Institute, Rotterdam, the NetherlandsABSTRACTThis paper reconstructs annual inflation figures for China, for theperiod 1953–1978, where inflation concerns the Consumer PriceIndex (CPI). One alternative index and two new models are consid-ered. The models associate CPI based inflation with the GDP inflatorand with retail prices, for the years after 1978. A combination of thethree ‘forecasts’ is taken as the reconstructed series. This newinflation series has proper face value and can be used for macro-economic data analysis in China.ARTICLE HISTORYReceived 12 September 2018Accepted 8 October 2019KEYWORDSInflation; consumer priceindex; reconstruction; retailprices; GDP deflatorJEL CLASSIFICATIONSE31; N15Introduction and motivationUsually, forecasts are about the future, but in this paper they are about the past, the pastof the national economy of China. Consumer Price Index (CPI) based inflation data areavailable since 1979 until now, but no reliable data are available for the period 1953 to1978. Figure 1 presents the CPI inflation rates that are currently available.Before 1953, inflation in China was high and very volatile, and difficult to comparewith today’s figures. And, again before 1953, due to civil war and much economic andgovernmental mishap, economic data for China are difficult to obtain. There are ofcourse interesting studies, like Burdekin (2000) and Campbell and Tullock (1954) thatprovide estimates of inflation figures in these periods, but it seems difficult to align thesewith more recent data, in terms of definition and measurement.A lucid discussion of Chinese Statistics is presented in Chow (1986). He writes (ibid,page 191)‘(. . .) One important aspect of modernization is the change in the collection, use, anddissemination of statistics. Chinese economics statistics were guarded as secrets for twodecades up to the end of the 1970s. The sudden release of many official statistics in 1980was as surprising to an informed observer as some of aforementioned changes.’The data on CPI based inflation that were released in those years and in the nineties,are presented in Figure 1. We see that for the overlapping years, that is, 1979–1990, thedifferences between the ‘old’ official inflation rates and the currently available inflationrates can be substantial. For example, for 1981 the official quote was 9.1, while today wewould have to rely on the quote 2.5. Also, for 1982, the ‘old’ official quote was −4.6, whilecurrently we must believe it is 2.0.CONTACT Philip Hans Franses franses@ese.eur.nl Erasmus School of Economics, Econometric Institute, POB1738, 3000 DR, Rotterdam, the NetherlandsThis revised version May 2019. I thank an anonymous reviewer for helpful comments.CHINA ECONOMIC JOURNAL2020, VOL. 13, NO. 3, 290–298https://doi.org/10.1080/17538963.2019.1679329© 2019 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License(http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any med-ium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.These large differences provide the motivation for the present paper. In this study,I will construct two new sets of (estimated) quotes, and also take aboard the alternativequotes reported in Imai (1994). For the two new sets, I use two different models toindependently provide ‘forecasts’ for CPI based inflation for the period 1953 to 1978.The first forecast draws upon Gross domestic Product (GDP) series. The World Bankprovides data on nominal and real GDP growth for the sample 1952 to 2016. Thisallows for the possibility to construct a GDP inflator, which in itself apparently cannotbe found on the internet. With CPI based inflation rates available since 1979, I canconnect these observations with the GDP deflator in a simple regression model. Themodel parameter estimates allow to predict the CPI inflation data for the years 1953 to1978. The second forecast draws upon the retail prices data as published in Chow andWang (2010).Together the two models give two sets of ‘forecasts’ for CPI based inflation for theperiod 1953 to 1978. Next, a linear combination is taken of these two forecasts and thequotes of Imai (1994), as it is well known that combined forecasts do well in practice, seeClemen (1989), Timmermann (2006), and many others. The newly constructed CPIbased inflation series has face value, in particular relative to historical events such as theGreat Leap Forward. It is thus hoped that the reconstructed data will be used in furtherresearch on macroeconomic data of China.This paper proceeds as follows. The next section provides the empirical models. Thesubsequent section presents the results and the final newly constructed data series. Thelast section concludes.-10-5051015202555 60 65 70 75 80 85 90 95 00 05 10 15INFLATION INFLATION_OFFICIALFigure 1. INFLATION refers to currently (August 2018) available CPI inflation rates, 1979–2017. Thesource for 1981–2017 is https://knoema.com/atlas/China/Inflation-rate. The source for 1979 and 1980is Burdekin (2000, Table I, page 224). INFLATION_OFFICIAL refers to CPI based inflation figures aspublished by the National Bureau of Statistics in China, 1953–1990. Source: Imai (1994), Table I onpage 134, the column with header CPIi.CHINA ECONOMIC JOURNAL 291Two models and one set of alternative quotesThis section presents three alternative quotes for CPI based inflation for the period 1953to 1978. The first quotes are presented in Imai (1994), and the next two methods are allbased on linking observable inflation form 1979–2017 with variables that are alsoobservable in the first period. Extrapolation is then used to create the forecasts of the past.Imai (1994)The first alternative quotes can be obtained from Imai (1994, Table I, page 134, under theheader CPIk). These alternative quotes are based on the unit price-based index. The dataappear in Figure 2, together with the officially published data. Inflation is computed asInflationt ¼ 100  log Price IndextPrice Indext1There are two periods with remarkable differences between the two series in Figure 2. For1960 the quotes are −0.6 (Imai) and 3.8, respectively. For 1961 the differences are evenlarger, 8.4 and 16, respectively, that is, the ‘old’ officially published figure is twice as largeas the Imai quote. A contrasting pattern occurs for 1992, where Imai quotes 11 and theofficial inflation rate is 2.7. The first two years, 1960 and 1961, correspond with a periodthat is usually called ‘The Great Leap Forward.’One could then expect high inflation ratesindeed. Whether the slowdown in inflation happened right after that period, that is, in1962, is open to discussion. For sure, the differences in inflation for 1963 are remarkable,that is, 2.3 for Imai and −6.6 for the official statistics.The second period with remarkable differences is 1980–1982. For these three years ina row, the Imai quotes are the modest rates of 0.8, 3.7 and 1.1, while the official statistics-8-40481216201955 1960 1965 1970 1975 1980 1985 1990INFLATION_IMAIINFLATION_OFFICIALFigure 2. The officially published CPI inflation rates (as available in 1994), and the new estimates ofImai (1994) relying on the unit price-based index.292 P. H. FRANSESare 6.8, 9.1 and −4.6. Interestingly, the Imai (1994) quotes are much closer to thoseavailable now (as in Figure 1), which suggests some additional validity of these quotes.CPI inflation and GDP deflatorFigure 3 displays the differences between Nominal Gross Domestic Product (GDP)growth and Real GDP growth. These differences constitute the GDP deflator. Thesedata are available for 1953 to 2017.Figure 4 presents the GDP deflator with the currently available CPI inflation rate series(1979–2017), and it is clear that the GDP deflator is much more moderate in theextremes, and that there are less peak values. This holds in particular for the periodhalfway the nineteen eighties.A regression of inflation on the annual GDP deflator, with the inclusion of a first orderautoregressive term, gives for the effective sample 1980–2017 the estimation results:Inflationt ¼ 0:065þ 1:168GDPDeflatort þ utut ¼ 0:458ut1 þ εtwith HAC standard errors 0.898, 0.119, and 0.152, respectively. The R2 is 0.842. With thisequation we can predict the inflation rates for 1953 to 1978, where the autoregressiveerror term is disregarded to make sure that the predicted values also have autocorrela-tion. The thus obtained forecasts are presented in Figure 5, together with the ‘old’officially published CPI inflation rates of Figure 1. The forecasts seem to associate-10-50510152055 60 65 70 75 80 85 90 95 00 05 10 15NOMGROWTH-REALGROWTHFigure 3. Nominal GDP growth minus Real GDP growth, 1953–2017. Source: https://en.m.wikipedia.org/wiki/Historical_GDP_of_China.CHINA ECONOMIC JOURNAL 293reasonably well with the official data, although there are also some remarkable differ-ences, particularly in 1960 and 1961 and for 1969 and 1970, where the latter two years arein the midst of the Cultural Revolution.-10-5051015202555 60 65 70 75 80 85 90 95 00 05 10 15NOMGROWTH-REALGROWTH INFLATIONFigure 4. GDP deflator and CPI based inflation rate (currently available).-10-50510152054 56 58 60 62 64 66 68 70 72 74 76 78INFLATIONF INFLATION_OFFICIALFigure 5. Forecasted CPI based inflation rates using the model including the GDP deflator, 1953–1978.294 P. H. FRANSES-20-10010203055 60 65 70 75 80 85 90 95 00 05 10 15INFLATIONCHOW INFLATIONFigure 6. The retail prices based inflation (1953–2008) and the CPI based inflation. Source: Chow andWang (2010, page 29, Table 1).Table 1. Newly constructed CPI based inflationrates (created in 2018) versus the officially pub-lished quotes (in 1994) for 1953–1978.Year New Officially published1953 3.5 2.21954 1.8 2.31955 0.6 2.31956 −1.1 0.51957 0.8 1.01958 0.1 0.21959 0.6 0.91960 −1.6 3.81961 12.1 16.01962 8.3 2.71963 −6.1 −6.61964 −3.2 −3.21965 −1.6 −1.91966 −0.8 0.71967 0.3 −0.71968 0.7 0.71969 −2.7 −0.81970 −1.8 −0.21971 −0.3 1.41972 0.3 −0.21973 1.2 1.71974 0.6 0.11975 −0.6 0.81976 0.3 0.31977 0.9 3.01978 0.8 1.4CHINA ECONOMIC JOURNAL 295CPI inflation and retail pricesChow and Wang (2010) consider consumer products prices, but then observed by theretail sector. Figure 6 presents the inflation rates based on the retail prices with thecurrently available CPI inflation rate series (1979–2017), and it is clear that the match forthe sample 1979–2017 is quite accurate. For the period after 1990, retail prices basedinflation is always larger than CPI inflation.Considering the same type of model as for the GDP deflator, the estimation results areInflationt ¼ 0:670þ 1:111 Inflation Retail Pricest þ utut ¼ 0:826ut1 þ εtwith HAC standard errors 0.592, 0.024, and 0.120, respectively. The R2 is 0.994.Also from this model we can predict the inflation rates for 1953 to 1978. The thusobtained forecasts are presented in Figure 7, together with the officially published CPIinflation rates of Figure 1. For 1962 to 1964, Figure 7 shows remarkable differences acrossthe two series. The forecasts are 14.2, 16.8 and 4.2, respectively, whereas the officiallypublished quotes were 2.7, −6.6 and −3.2.Reconstructed CPI based inflation in ChinaNow we have three alternative quotes for CPI based inflation for 1953 to 1978. Two of thethree are based on two highly accurate models. The third quote is based on an alternativeproducts basket, see Imai (1994).-20-15-10-50510152054 56 58 60 62 64 66 68 70 72 74 76 78INFLATION_F_CHOWINFLATION_OFFICIALFigure 7. Forecasted CPI based inflation rates using the model including Retail Prices inflation,1953–1978.296 P. H. FRANSESThe simple average of these three quotes gives the numbers in the second columnof Table 1, and the graph appears in Figure 8. It is clear that the new CPI basedinflation series cuts the raw edges from the ‘old’ data. The new data seem to havestrong face validity, in particular in the period around the Great Leap Forward.Also, the worldwide recession of 1974 and 1975 is now also reflected more in thenew data.The reliability of the new data is amplified by the results in Table 2. If the average ofthe three available quotes for the years 1979–1990 is compared with the currentlyavailable ones and the ‘old’ official quotes, we see that the average is very close to the-8-404812162054 56 58 60 62 64 66 68 70 72 74 76 78AVERAGE INFLATION_OFFICIALFigure 8. Newly created CPI based inflation series (created in 2018) versus the officially published rates(which were published in 1994).Table 2. Newly constructed CPI based inflation rates using theaverage of three quotes versus the ‘old’ officially publishedquotes (in 1994) for 1979–1990.Year Old quotes Current quotes Average1979 2.1 2.0 2.61980 6.8 6.0 3.41981 9.1 2.5 2.91982 −4.6 2.0 1.71983 1.2 2.0 2.01984 1.7 2.7 2.61985 9.0 9.3 10.11986 6.3 6.5 6.31987 7.1 7.3 8.41988 17.4 18.8 18.31989 16.1 18.0 17.41990 1.6 3.1 3.0CHINA ECONOMIC JOURNAL 297currently available data. In particular, the exceptional ‘old’ values in 1981 and 1982 arenot present in the average.ConclusionThis paper presented new quotes for CPI based inflation rates for the period 1953 to1978. Official quotes (1994) do exist but may be viewed as unreliable. Using three sets ofalternative quotes and taking the average of these, resulted in a newly created CPI basedinflation rate.The methods in this paper might also usefully be implemented for other countrieswhere there is a lack of data in certain periods, think of North Korea, Vietnam andvarious African countries. Further research is needed.Disclosure statementNo potential conflict of interest was reported by the author.ORCIDPhilip Hans Franses http://orcid.org/0000-0002-2364-7777ReferencesBurdekin, R. C. 2000. “Ending Inflation in China: FromMao to the 21st Century.” Cato Journal 20:223–235.Campbell, C. D., and G. C. Tullock. 1954. “Hyperinflation in China, 1937–1949.” Journal ofPolitical Economy 62 (3): 236–245. doi:10.1086/257516.Chow, G. C. 1986. “Chinese Statistics.” The American Statistician 40: 191–196.Chow, G. C., and P. Wang. 2010. “The Empirics of Inflation in China.” Economics Letters 109:28–30. doi:10.1016/j.econlet.2010.07.009.Clemen, R. T. 1989. “Combining Forecasts: A Review and Annotated Bibliography.” InternationalJournal of Forecasting 5: 559–583. doi:10.1016/0169-2070(89)90012-5.Imai, H. 1994. “Inflationary Pressure in China’s Consumption Goods Market: Estimation andAnalysis.” The Developing Economies 32 (2): 127–154. doi:10.1111/j.1746-1049.1994.tb00045.x.Timmermann, A. 2006. “Forecast Combinations.” InHandbook of Economic Forecasting, edited byG. Elliott, C. W. J. Granger, and A. Timmermann, 135–196. Amsterdam: Elsevier.298 P. H. FRANSES

Inflation in China, 1953-1978

https://pure.eur.nl/files/47228856/Repub_132457_O-A.pdf

Inflation in China, 1953-1978

Abstract

Similar works

Full text

Available Versions

EUR Research Repository