Research On The Factors And The Transmition Mechanism Of Inflation Under The Exchange Rate Fluctuation

In July of 2005,China adopted the managed floating exchange rate regime.Since then,The characteristics,main factors and the transmition mechanism of inflation have changes significantly compared with before.So it is important to find out the factors and the transmition path of inflation in different circumstances.For the control of inflation,different factors may mean different even opposite policies.Thus the paper focuses on studying the factors and the transmition mechanism of inflation after the RMB's exchange rate reform in China.The main conclusions are listed as follows.Firstly,low inflation has become more and more popular.In the time of low inflation,with the growth of the economy,the government's revenue and people's income have increased on the one hand,on the other hand,the harmful effect of low inflation has not created the political and social issues which beyond the capacity of the government.Secondly,the exchange rate can influence inflation by direct way and indirect way.The paper empirically analyzes the time-varying elasticity of the exchange rate pass-through based on the state space model.The result indicates that the although the appreciation of RMB can restrain the inflation in theory,but the effect is so weak.And on the opposite,with the anticipation of RMB's appreciation and the surplus of money liquidity,the inflation is occurred accompanied by the RMB's appreciation.Thirdly,the growth of money supply is the main factor of inflation.More details,foreign trade as the leading mode of economic growth has led to the double surplus of the international payments' balance.Thus the central bank was forced to buy the foreign currency by releasing the base money in the market.These actions are reflected both in increase of foreign assets in the asset's side and the reserves in the liabilities' side of the balance sheet.And by the mechanism of money multiplier,the base money becomes more larger.By this way,the surplus of money liquidity have important effect on inflation.Fourthly,the inflation is influenced not only by the inertia of itself,but also the GDP gap.And the paper describes the transmission mechanism from GDP gap to inflation.From this view,we can improve the potential output by continuously promoting the technological progress and improving the productivity.By doing so,we may achieve the good economic situation with high economic growth rate and low inflation rate.Fifthly,the paper uses the granger causality and smooth transition autoregressive model to analyze the interaction between average data and inflation data in China.The empirical studies show that inflation does granger cause average wage while the average wage does not granger cause inflation at 5% significance level.The inflation influenced the wage mainly due to the inflation anticipation,the higher of the inflation level,the longer of the time lasting,the stronger of the inflation anticipation,thus the higher pressure for the increase of the wage.The paper also indicates that the main factor of wage's determination have changed from the inflation to inertial of itself in about 1998.Sixthly,the inflation after the exchange rate reform is influenced by mixed factors.These mixed factors included the inflation inertial,the GDP gap,the surplus of money liquidity causing by the increase of foreign reserve,the increase of average wage.All these factors working together to form the inflation.Obviously,this greatly increased the complexity and difficulty for the control of inflation.Seventhly,the paper put forward some policy suggestions.The recommendations mainly include: to improve the management system and off-measures for the exchange reserves;to promote the RMB's exchange rate reform and speed up the process of RMB's internationalization;to adjust the economic development strategy and shift to domestic demand leading;to pay attention to the adjustment of the wage's internal structure;to master the speed and magnitude of the wage's adjustment,to promote scientific and technological progress and improve production efficiency;to improve the management of inflation's expectation,etc.