Abstract:Since 2000, China's two major price indexes CPI and PPI have appeared "divergence" growth for many times. Especially in the last three years (2011-2013) this phenomenon was more obvious. This inversion growth of different price indexes has weakened the ability of central bank to stabilize the price level. By constructing a three-sector dynamic stochastic general equilibrium model, we explore the structural causes of the divergence between CPI and PPI. It is shown that the flow of labor between different sectors has promoted the expansion of the service sector and contraction in the agricultural sector as a result of a monetary shock. The CPI rises while the PPI experiences a short-term rise and then begins to decline, thus resulting in "divergence" between the CPI and PPI. The three-sector model constructed in this paper is not only good at explaining CPI and PPI's “divergence" growth, but also used for the study of the effectiveness of monetary policy under current china’s dual economic structure.

Keywords: Divergence of CPI and PPI; Monetary Policy; Three-Sector Model; DSGE

JEL Classification: E31，E51