| China’s economy touched the bottom in2008. From the end of2008, the economy began to rebound quickly, but meanwhile the inflation rate is rising rapidly. Till the end of2010, the CPI inflation rate reached4.7%, the RPI inflation rate reached4.23%. In the third quarter of2011, the CPI inflation rate reached6.27%, the RPI inflation rate reached6.03%. The continous rise of consumer price index deepens the concerns among the public and theorists that the inflation will continue to rise in the future. In response to a rising inflation rate, People’s Bank of China had adopted a tight monetary policy which appeared as rise of the deposit reserve ratio to a record high, continuous positive repurchase, frequent rise of benchmark deposit and lending interest rates, continued to strengthen credit control series of austerity policies. More importantly, the People’s Bank of China for the first time set stabilize inflation expectations, control the rate of inflation as the primary goal of monetary policy in2011, and announced a target range for annual regulation of the rate of inflation, but the cost is reducing the growth rate of GDP. Thus the monetary policy falls into a dilemma. Understanding of the characteristics of China’s inflation can help the adjustment and the effective use of monetary policy and the effective combination of various government macro-control policies. The natural question is, what dynamic characteristics China’s inflation has? What are the factors determining inflation in China? How does the dynamic characteristics and influencing factors of inflation influence the implementation of monetary policy rules in China?This article was based on these practical problems, trying to find out the dynamic characteristics of China’s inflation from the perspective of inflation inertia and hybrid Phillips curve. And with inflation inertia and inflation expectations constraints, how would China implement forward-looking monetary policy rules. This study has important theoretical and practical significance to the monetary authorities in the management of inflation expectations, reduce inflation inertia and monetary policy operationsIn addition to the introduction and conclusion, the book is divided into4chapters:Chapter2made a systematic theory of inflation inertia, the hybrid Phillips curve with forward-looking monetary policy rules reviewed. This chapter attempts to tease out a theoretical context of the inertia of inflation, the hybrid Phillips curve and forward-looking monetary policy rules, in order to design and empirical analysis of the theoretical framework behind inflation inertia and hybrid Phillips curve, and based on the hybrid Phillips curve analysis of forward-looking the policy effects of monetary policy rules to lay the theoretical foundation.Chapter3gives a theoretical framework for the inflation inertia, the hybrid Phillips curve with forward-looking monetary policy rule. First, the chapter reviewed Gali and Gertler (2000) based on the structural framework of the hybrid Phillips curve, merged Roberts (2001), Zhang Osborn and Kim (2008), Yang Jisheng (2009) views and practices, which gives the New Keynesian hybrid Phillips curve in the form of higher order lag. High order lag in the new Keynesian hybrid Phillips curve not only embodies the rational expectations augmented Phillips curve, but also embodies the adaptive expectations augmented Phillips curve, and thus from a more microscopic point of view gives the New Keynesian hybrid Phillips curve form and depicts the inertia of inflation impact on inflation. At the same time, high order lag new Keynesian hybrid Phillips curve also contains a reflecting adaptive expectations and rational expectations features of the structural parameters as well as to reflect the firm pricing probability and the expected characteristics of the depth parameter. Secondly, in the Review of Monetary Policy Rules benchmark linear rational expectations (LRE) model on the basis of this chapter, based on higher order lags behind the new Keynesian hybrid Phillips curve, constructed from the forward-looking monetary policy rules in linear rational expectations (LRE) model and further gives the optimal form of the forward-looking monetary policy rule based on the hybrid Phillips curve.Chapter4attempts to measure higher order lag hybrid Phillips curve based on GMM model testing and empirical analysis, not only to portray the dynamic characteristics of China’s inflation to mix Phillips curve and its structural parameters and depth parameters, and can be more accurately measure the size of the inflation inertia and its impact on inflation. Meanwhile, for robustness, this chapter selected the CPI and RPI as the measurement of inflation rate for empirical analysis. The structural parameters of the GMM estimation results show that:our Phillips curve has higher order lag hybrid characteristics, inflation at the same time there are forward-looking rational expectations, and backward-looking adaptive expectations, and therefore monetary policy should manage inflation expectations and reduce inflation inertia both at the same time; depth parameters of the GMM estimation results show that:firm pricing probability, the CPI inflation rate relative to the RPI rate of inflation, the price adjustment interval is longer, firms is less sensitive on the economic policy response; firms expected behavior, the CPI inflation rate relative to the RPI inflation rate, the dependence of the firms of adaptive expectations is more than rational expectations.Chapter5converted monetary policy rule based on the higher order lag hybrid Phillips curve forward-looking equation LRE system into the SVAR system, and structural parameter estimates and impulse response analysis in the SVAR system, in which the parameters estimated for the test parameter values based on forward-looking monetary policy rules in the hybrid Phillips curve, the impulse response analysis in the monetary policy transmission mechanism of the hybrid Phillips curve in the forward-looking monetary policy rules under the monetary policy framework, simulated demand shocks, supply shocks and monetary policy impact on the rate of inflation, output gap and short-term nominal interest rate path. Structural Parameter Estimation Indicates: China’s monetary policy rules based on the CPI and RPI has forward-looking, characteristics and inertia characteristics; the CPI based monetary policy rules forward-looking characteristics is stronger relative to that of RPI-based. The delay from the CPI based monetary policy rules is stronger than that of RPI-based. The impulse response analysis showed:the output gap, inflation and short-term nominal interest rate impact of monetary policy (disturbance) the impact of demand (disturbance) shocks and supply (disturbance)have lag effect; inflation inertia, the generalized impulse response path and structure of the shock response path has a significant effect; RPI-based monetary policy is more effective than the effects of monetary policy based on the CPI; RPI-based monetary policy effect with certainty, economic variables deviate from the steady state will eventually recover to a steady-state level, The effects of monetary policy based on the CPI has the characteristics of uncertainty. |
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