China Inflation Uncertainty

Inflation uncertainty will lead to signals disorder of the whole economy system and reduce the efficiency of resource allocation, thereby intensify macroeconomic fluctuation and further become the new incentive of inflation or deflation. For these reasons, the economic theory generally takes the uncertainty as the real crux of the inflation dangers. However, the domestic researches on this issue are still in the primary stage and not yet form systematic studies. In contrast to this fact, this dissertation applies the last developed methods abroad including econometric techniques, game theory analysis, hypothesis-driven analysis, model calibration and numerical methods to carry a profound and systematic research on related issues about China's inflation uncertainty, expecting to draw some conclusions which have plenty of theoretical meanings and practically instructional meanings.The main contents and conclusions contained in the dissertation are:First, using random field regression model to do a more detailed study on the relationship between the level of inflation and inflation uncertainty in China from a non-linear relationship perspective. The conclusion shows that they interact in a non-linear mode, and can not be dealt with from a simple linear point of view. In addition, using the Unobserved Components model with Markov regime switching to decompose total inflation uncertainty into long-run and short-run inflation uncertainty, and to test their respectively relationships with the level of inflation, we discover that higher inflation is usually accompanied by higher long-run and short-run inflation uncertainty.Second, for the connection of money growth with inflation, this dissertation emphasizes their second moments, and proposes an econometric hypothesis which has been ignored by existing empirical researches: there is a "volatility spillover" effect from money growth uncertainty to inflation uncertainty. The empirical results based on Chinese data provide support for the above hypothesis: because of the great changing of policy goals along with low level of the information clarity and central bank reputation, the monetary policy tools that should have contribute to stabilization aren't able to absorb and buffer the shocks. Since that, the public face great uncertainty. This leads to a positive relationship between money growth uncertainty and inflation uncertainty, namely, the"volatility spillover"effect. Third, on the basis of theoretically analyzing the sources of China's inflation uncertainty, this dissertation applies time-varying parameters model with Markov regime switching to decompose the source of inflation uncertainty into two components: one is the inflation uncertainty caused by macroeconomic policies, the other is the inflation uncertainty caused by unexpected shocks to the economy. Their effects on the output are then testified by using joint estimation method. The study finds that the latter dominates the overall uncertainty and that the inflation uncertainty from different sources may have different influences on the economic growth.Fourth, we expand the consistent expectations hypothesized new Keynesian Phillips curve brought by Lansing (2008). By introducing signal-noise ratio which represents the relative size of long-run inflation uncertainty compared to short-run inflation uncertainty, the expanded model can explain the features of China's inflation persistence quite well, and discover that the slow adjustment of the expectations and the imperfectness of central bank's credibility may be the main reasons of the high inflation persistence in China.Fifth, by establishing a game model, this dissertation investigates how the credibility of monetary authorities influences the public inflation expectations, and studies some fundamental factors that will affect monetary policy credibility. Meanwhile, the difference of reducing inflation volatility and inflation bias between two kinds of inflation targeting, is also studied in the framework of this game model. The conclusion tells that the non-state contingent inflation targeting has greater inflation volatility than state contingent inflation targeting, but less inflation bias. The improvement in the credibility of monetary policy, the improvement in the prediction ability of central bank and the reduction in the frequency of monetary policy target changing will help to reduce inflation volatility and inflation uncertainty.Compared with the existing researches, this dissertation has the following innovations:1. In the logical starting point of analysis, this dissertation takes inflation uncertainty as the breakthrough point to study China's inflation issues more systematically from a brand new perspective, which broadens the outlook and ideas of the study on China's inflation issues.2. In the applications of econometrics methods, in consideration of the complexity of China inflation dynamics process, this dissertation applies the random field regression model, time-varying parameters model with Markov regime switching, Unobserved Components model with Markov regime switching to analyze the inflation uncertainty for the first time in domestic. The applications not only enrich the econometrics analysis methods and techniques in studying of China inflation, but also draw some innovative conclusions which cannot be found by traditional models.3. In the part of theoretical hypothesis and the theoretical model, a new econometrics hypothesis is proposed: there exists "volatility spillover" effect from money growth uncertainty to inflation uncertainty. In addition, by modifying the assumptions, this dissertation rededuces the consistent expectations hypothesized New Keynesian Phillips Curve, and calibrates the model combined with related China parameters, and successfully explains the features of inflation persistence using this model.The presence of high inflation uncertainty means the low efficiency of resources allocation. Currently, China is still in a stage of rough economic expansion and the available resources are limited. To fulfill the goal of sustainable development of social economy, we should keep a low level of inflation uncertainty and mitigate the harm that inflation uncertainty would do to economic system. Consequently, this dissertation advises the monetary authorities to establish an inflation expectation database and take inflation uncertainty as an important indicator of the macroeconomic supervision to focus on and effectively control. When evaluating the effectiveness of monetary policy, we may set inflation uncertainty indicator as a reference. More importantly, controlling inflation uncertainty should be the theoretical and political footstone when the government deals with inflation.