The Research On The Inflation Risk Of Positive Fiscal Policy

In2008, The World economy crisis which caused by The United States financial crisis have been continuously increased, China can’t remain perfect in this crsis. In this regard, Chinese government adopted the active fiscal policy, aimed to keep the stability of domestic economy. Compare to the active fiscal policy implemented in1998, the side key of a series of macroscopical economic policy that the government published1998is investing demand at stimulation, but in current round of active fiscal policy,"increase government spending" and "reduce tax" are the main content. Below the stimulation of effective fiscal policy, Chinese economy developed continuously and healthily. But the Inflation risk is increasingly revealed. By reviewing the Chinese economy entered a rise period since2003, and start to slide down in2008, we found that the inflation is a looming problem. Why the current round of inflation is always the constitutive rise? Why CPI increases accelerated when economy had been affected by the financial crisis? Some studies suggest that the main reason which led to inflation risk is abusing publishment of currency. However, the author thinks it only the surface feature of inflation. This paper comes to the angle of active fiscal policy to analyse the deep level reason of inflation.Friedman once said, inflation is a fatal disease, if it is not to be admistrated effectively in time, it will destroy the whole of society. Inflation is also a problem which economists have been engaged in for a long time, they try to settle inflation risk from system and policy. But the first consider question is what inflation is? What is the discrinant criterion of inflation? Monetarists and fiscalists have different views about inflation formation mechanism and its management strategy:monetarists hold that inflation is always and everywhere a monetary phenomenon; and fiscalists hold that inflation is whether a monetary phenomenon depends on the character of fiscal policy, when the fiscal policy is non-Ricadian, inflation is a fiscal phenomenon.The neo-classical synthesis theories think that when during an economic downturn, the deficit has no risk. Only when potential productivity play out, the deficit become the main factor driving inflation. Thus, the judgment of inflation will be the first qustion.Woodford (2001) thought that non-Ricardo fiscal policy to fight inflation has three-layer meaning:First, when government is using non-Ricardo fiscal policy, stable monetary policy is a better choice than aggressive monetary policy. Second, choose the collection of aggressive monetary policy and part-Ricardo fiscal policy, and should give up the collection of stable monetary policy and non-Ricardo fiscal policy. Third, to complete the second meaning, and make local unique solution which always near inflation targeting become whole unique solution. Concretely, institution arrangement is:when the level of inflation is high, center bank will rises rate immediately, to avoid inflation risk; when the level of inflation is low, the government will use active fiscal policy, to avoid inflation risk. So here is our second question: review the combination of Chinese fiscal policy and monetary policy since2008, they use the cooperation with the active fiscal policy and easy monetary policy from2008to2010, and the active fiscal policy and stable monetary policy from2010till now. Dose these combination policy obey the process inflation combination policy of non-Ricardo fiscal policy? If not, what is the consequences result?When the potential output approach to actual output, implement the active fiscal policy will led to inflation. However,"potential output" is not constant, empirical method can only describe the "potential output" that has produced the futhure "potential method" cannot be reflected."Potential output" can be changed by social system and technological innovation. Here is our third question:where is the edge of active fiscal policy?Below current condition, international economy hasn’t stabilized yet, they can influence Chinese economy by international trade and international capital flows. But in domestic, a lot of new situation and problems has come up. Hence, Chinese active fiscal policy has to advance industrial structure to upgrade while expand inside need. And this is also our fourth question.This paper tries to construct a solid framework for the research on the inflation risks from Chinese active fiscal policy which has both theoretical basis and empirical research through answer four questions above.(1)This paper analyses Chinese inflation since the reforming and opening, we can classify the style of Chinese inflation as adaptive inflation. Current inflation affect by the lagging effects of early inflation, especially the relationship with output gap is positive correlativity.(2)Looking back on Chinese two round active fiscal policy, the first round active fiscal policy caused inflation to some extent, this suggest that active fiscal policy may make social total demand exceeds social total supply, and a demand pull inflation could happen. The government implemented second round active fiscal policy in2008, domestic economy had inflation risk, at this background, the implementation of active fiscal policy must be used carefully. This paper adopt the theory of FTLP to analyze the transmission mechanism of active fiscal policy, we believe that whether active fiscal policy could lead to inflation decide by the choice of policy, if the government choose non-Ricardo fiscal policy, the inflation will be a fiscal phenomenon. By research Chinese current economy condition, we notice that if active fiscal policy only be implemented for a short time, Ricadian Equivalence Rule do not suit, and no squeeze effect. The impact of implementing active fiscal policy on inflation is most obvious in two lag.(3)The potential output and real output of China have very little volatility, and have periodic. The relationship between Chinese output gap and inflation rate variation is positive correlativity, but there is no relationship between output gap and inflation rate. After world financial crisis2008, Chinese output gap shift from negative gap to positive gap, because the relationship between Chinese output gap and inflation rate variation is positive correlativity, so if government continue implement active fiscal policy, the inflation risk will be spread.(4)This paper analyzed the concrete measure of active fiscal policy, we found that the relationship between financial deficit and inflation is positively correlated, the relationship between financial expenditure and inflation is the same, but the relationship between tax and inflation is negative. So either financial deficit or tax must be in certain scale, otherwise, it will cause inflation risk.