Econometric Studies On The Generating Mechanism And Affecting Mechanism Of China's Inflation Process

Inflation is a comprehensive and complex macroeconomic phenomenon. Sometimes the inflation can burn the economic body like fire. It can change the relative price system of a variety of the commodities and the manufacturing materials so that it will have some far-reaching effects on the real output, consumption and the effective distribution of the resources. So the people have paid attention to the inflation for a quite long time.Since the year of 1978 for the open and reform policy, our economy has developed dramatically for more than 20 years. During several rounds of business cycle, inflation and disinflation happened respectively. Especially from 1984 to 1989, the inflation rate reached as high as 10%. From 1991 to the first half of 1993, because the central government adopted the positive monetary policy, the large investment and consumption were stimulated and expanded sharply. And this led to the unbalance of the macro economy and the inflation. After the financial crisis hit Southeast Asia , the effective demand became the biggest concern in the economic development in China. During the period from 1998 to 2001, the unexpected disinflation happened to China. At the end of 2003, our country came into another round of inflation owing to the sharp rise in price of the steel, energy and real estate.Our country is facing both the globalization challenge and the continuous deepness of the economic system reform. It is necessary to analyze the inflation's generation mechanism and affecting mechanism in order to have better understanding of the inflation rules and prevent the happening of the economic and financial risk for the stable economic development.According to the current studies, we shall make the theoretical and empirical studies on the generating and affecting mechanism of China's inflation.In Chapter 1, we make the brief introduction to the current studies on the inflation. Firstly, we give the several definitions of the inflation and make some comparison with other similar concepts. And we introduce the current studies conditions at home and abroad from 5 ways, the dynamic path of the inflation, the reasons , the dynamic relationships between the economic growth and the inflation, the welfare cost and the monetary rules. In addition, we provide the main features of the paper.In Chapter 2, based on the history of the economics, we divide the inflation theory into 2 groups. One is the equilibrium inflation theory, the other is the disequilibrium inflation theory. The equilibrium inflation theory consists of the monetary quantity theory, monetarism I and expectation inflation theory. The disequilibrium inflation theory is composed of neo Keynes and post Keynes and structure inflation theory .And we make the comparison of the short run and the long run Phillips Curve.In Chapter 3, we make the econometric analysis of the inflation dynamic path. We apply the Chow, CUSUM and CUSUM square, GARCH and Markov regime Switch model to describe the dynamic path of China's inflation dynamic path. We find that the variance in the high regime is larger than in the low regime based on the smoothed probabilities. The transition probability from the high regime to the low regime is higher. The persistence of the low regime is longer than before.In Chapter 4, we make the empirical analysis of the reasons of China's inflation. The reason is divided into short and long run reasons. The long run reason is derived from the continuous large money supply by means of the cointegration test. We make use of MTV model to analyze the short run reason.. The reason signifies that the mixture of the demand shock and the supply shock are the real reasons for the first period from 1986-1996 and the supply shock such as the farm products , crude oil and wage is the main reason for the second period from 2003 to the first half of 2007. In Chapter 5, we have the empirical analysis of the relationship between the economic growth rate and the inflation rate. We obtain the cycle and trend value of these two variables by means of HP filter. We analyze the Granger causality relationship between the economic growth rate and the inflation rate and make the dynamic correlation graph of this two variables. In terms of level value, the economic growth responds to the inflation shock about 1to 2 months later. But in terms of the cycle value, they have less correlation and the cycle of inflation is 8 months later than the economic growth.. Then we use the cointegration theory and ECM model to analyze the long and short run relationship. In the long run, the relationship between the economic growth rate and the inflation rate has a cointegration relation. And the cointegration error was adjusted sharply from 1992 to 1996 and from 2004 to 2005. This shows that he nominal economy strays away far from the real economy. In the short run, the economic adjustment is mainly derived from the autoregressive process and the inflation adjustment process. The inflation adjustment process is mainly from itself.In Chapter 6, we make the further empirical analysis of the welfare cost of China's inflation process.. Firstly, we make the statement and comparison of the related welfare cost documents based on the partial equilibrium, neo classic economics and the Keynes economics. Under the study framework of Lucas (2000), we measure the welfare cost changes at the different stable state inflation rate by means of the money supply function in the partial .We find that the inflation in China has larger effect on economy than in America. Especially when the nominal interest rate is higher than 13%, the cost of the log function is increasing larger than the log-log function. With the rise of the inflation rate, the cost is also increasing. When the inflation rate is higher than 10%, the cost curve is increasing sharply. That means the cost of the worse inflation is not accepted by the people.In Chapter 7, we focus on the dynamic relation of the monetary rules and the inflation rate. We have a review of the monetary policy history. With the economic development, we utilize the time varying parameter state space model, we find that although the Fisher effect exists in China, it has less. The change of the nominal interest rate can indicate the change of the real interest rate and the direction of the monetary policy. So we consider to take the nominal interest rate as the intermediary target.In short, with the development of the interest rate and exchange rate market, we shall have better acknowledgement and understanding of the objective rules of China's inflation. That will make a good reference platform for the policy making and avoid the financial crisis to promote the economic development on the stable and healthy way.