Research On The Inflation Expectation In China

The price must be faced in any country. The law of development of the worldeconomy suggests that many fast-growing economies are inevitably accompanied bythe inflation. The inflation in China have closely linked to the inflation expectationssince the reform and opening up. When inflation expectations at a low level, thehigher the money supply and economic growth, low inflation brought about only, butWhen it at a high level, the same money supply and economic growth will lead tohigher inflation. Thus, a systematic study of Chinese inflation expectations will helpus better understand the formation and the expected effect, which has great theoreticaland practical significance of price stability and overall economic development. In thiscontext, we will use the comparative analysis, historical study and measurement ofempirical methods to study it.The purpose of the research on the inflation expectations was meant to guide andmanage it. So we need to understand the basic characteristics and the formationmechanism of inflation expectations in China. The economic practices and data inChina show that the behavior of inflation expectations has obvious characteristics ofuncertainty and heterogeneity, which largely determine the formation of inflationexpectations. The perception of the information is different due to the obviousdifferences in education, age, income level, knowledge structure, risk preferences andother informations for the economic agents. If the people has more scientificknowledge structure, more rational risk appetite and preference, it can be easier andmore precise to gather information for the inflation expectations. Otherwise, therewould be a certain error between the expected and actual inflation due to theimperfect knowledge and relatively sensibility. Although this difference is stable inthe short term, whether economists or the general public will form a similar result inthe long term that approximates the actual rate of inflation by learning and judging thepast results of any groups.Overall, inflation expectations in China should be discussed from both horizontaland vertical angles. It is expected to have a significant heterogeneity from thehorizontal angles, in which the formation of the expert closer to rational expectations,and the formation of the general public closer adaptive expectations, while the formation of the whole society approach closer finite rational expectations. In thesame way,it is expected to have a significant uncertainty from the vertical angles, inwhich the formation be similar to the non-rational expectations in the short term andrational expectations in the long term, while it is expected to be a viscous expectations.It constitutes the main aspects of the uncertainty about the inflation expectations inChina.While the formation of inflation expectations in China is expected to largelydepend on the demographic and economic characteristics of the people, it is alsoaffected by changes in the market environment, such as housing price, exchange rate,monetary policy, etc. The impact of exchange rate changes on inflation expectationsreflects that the Chinese people will give more attention on the changes about thecapital market and external factors, which includes the amount of credit, foreignexchange hedging, hot money inflows, etc. The impact of monetary policy oninflation expectations makes us realize that if monetary policy formulated by thecentral bank be changed in the short run frequently, the inflation expectations wouldbe stuck at a high level, which will drive up the actual inflation. The impact ofhousing price on inflation expectations reflacts that it is an effective tool to guideinflation expectations by improving people’s livelihood, such as stabilizing housingprices. In addition, the actual reaction on inflation expectations is also an importantreason for the formation of higher inflation expectations. If the inflation showed arapid rising trend, the people is bound to raise inflation expectations in the comingperiod, and then screw up the process of the formation on the inflation expectationsand actual inflation.The impact of inflation expectations on actual inflation will be manifested bychanges in the way of the behavior of different subjects. It will make greater volatilityin demand, which includes the consumer demand, investment demand, governmentspending and net export demand. Meanwhile, inflation expectations will also impactthe price of labor and other factors of production, which would make greater volatilityin aggregate supply. Changes in the total supply and demand will further lead tostructural imbalances in the economy.Combination of the historical research on the inflation and inflation expectations,Chinese government should recognize the necessity to manage inflation expectations.It is a good way to try to establish a management system both on horizontal and vertical angles. In the specific operation, the departments should not only have toconsider the heterogeneity of different people, but also pay attention to liquidity, realestate prices, the money supply and other market factors that affecting the formationof inflation expectations. At the same time, the departments should not only beeffective use of the media tools, but also pay attention to the time span in themanagement process. In short, the government should be timely and appropriate toprovide a targeted response measures to stabilize inflation expectations and theeconomy in China on the basis of accurate grasping of the formation and the effect ofinflation expectations.The innovation of this paper is mainly reflected in the study of Chinese inflationexpectations systematic, theoretical aspects and timeliness. Through the historicalInvestigation and empirical analysis, we discussed the formation mechanism, factorsand effects of the inflation expectations in China, and proposed two-way managementsystem based on the top-level design. Meanwhile, this paper also has some limitations.The empirical analysis needs to be further improved, and the study also needs to bemore microcosmic between the factors and the inflation expectations in China.Therefore, we have a lot of research to be conducted.