China´s business cycle and the price level

Price level is the core indicator of market-economic operation and the relationship between the price and the business cycle is one of the most important problems which have intently drawn the attention of the theorists. This paper analyses the relationship between the price and China´s business cycle with the co-integration test, Granger causality test, establishing the VAR model, proceeding Impulse Responses and Variance Decomposition. The conclusions show that: the Consumer Price Index (CPI) is the one-way Granger cause of the Warning Index, and there is a stable equilibrium relationship between these two indexes in the long run; the business cycle is influenced by its own inertia for it has a strong independence; the CPI also affects the business cycle with a positive effect at the beginning, then it turns negative rapidly and expands with a contribution rate of 10%.