Theoretical And Empirical Research On Inflation Dynamics

The nature of inflation dynamics is one of the most eminent issues in macroeconomic research.In the new Keynesian theory,these properties are concentrated on the Philips curve.This paper studies the new Keynesian models in a single-stage production with monopolistic competition,i.e.the sticky price model,the sticky information model,the hybrid new Keynesian model and the dual stickiness model.Furthermore,this paper figures out the difference of monetary policy between sticky price and sticky information in the new Keynesian model characterized by multi-stage vertical production chains with monopolistic competition.The better way to analyze the optimal monetary policy under the new Keynesian framework is to minimize a given welfare loss function(or derived from a utility function of the family sector),and one of the constraints is the Phillips curve on the supply side representing the relationship between inflation and output gap.The welfare loss function should be basically correct since the welfare loss function is derived from the second order approximation of the utility function and if the utility function is set correctly.Then,to get reliable conclusions of an optimal monetary policy analysis,the key point is to find a reliable Phillips curve.The reliable Phillips curve should be able to reproduce a few significant dynamic characteristics of “inflation-output”:(1)Under the modern country’s credit standard,inflation is persistent or it has “inertia”;(2)It lacks inertia under the gold standard;(3)Inflation is cyclical and lagged with respect to output.In addition,the optimal monetary policy analysis of such an economic system containing such a Phillips curve should be consist with the two universally recognized monetary policy effects: First,the suppression of inflation will cause economic recession;Moreover,the impact of monetary policy looks like a “Hump”.Untill now,there exist many Phillips curves derived from different theories,such as the sticky price theory,the sticky information theory,the hybrid New Keynesian theory and the dual stickiness theory,which have their own advantages and disadvantages according to the above standards.These Phillips curves are based on the characteristics of western economies,and the empirical test also uses dates of the developed countries such as Europe,the United States,Japan etc.Naturally we want to know,whether these theories can explain China’s inflation dynamics,and which kinds of Phillips curve should be selected to analyze the optimal monetary policy in China.Furthermore,if the Phillips curve is more than one in a dynamic system,in other words,we can find a large number of different curves through the division of the production structure,then how they affects the implications of monetary policy analysis.Guided by the above problems and based on historical records,this paper first reviews the theoretical exploration of inflation,expectation,and the effects of anticipated inflation on the nature of money(money is neutral or not)from the classical to the new classical schools before the formation of the dynamic new Keynesian framework;The introduction of irrational and rational expectations helps to familiarize with the internal mechanism of homogeneously and heterogeneously expected models,so we can empirically analyze and comparatively study the similarities and differences between the homogeneous expectation model of sticky price and sticky information and the heterogeneous expectation model of hybrid new Keynesian and dual stickiness in a unified framework and the Chinese data background.The above models are constrained by the assumption that there is only one monopolistically competitive market environment.Finally,an extented dynamic stochastic general equilibrium framework characterized by the sticky information theory will be used to analyze monetary policy in the multi-stage production structure with monopolistic competition.Several main conclusions are obtained in this paper:(1)Both sticky information and sticky prices are fully embodied in the Chinese market;(2)The dual stickiness model is different from the hybrid model under Chinese data characteristics;(3)In China,The average price adjustment frequency is 5 quarters and the optimal pricing frequency is averaging 7.7 quarters based on the latest information under the dual stickiness model,and the proportion of the enterprise being looking-forward rational expectation is 72%,while the number is 28% to the enterprise being backward-looking adaptive expectation in the hybrid model;(4)Although the goodness of fit of the dual stickiness and the hybrid model is nearly the same,the Chinese data tend to match the latter;(5)There is no monetary policy that can achieve Pareto optimum in the multistage monopolistic new Keynesian sticky information model.The optimal interest rate rule should include the price level of each production stage,and the “inflation targeting” as the optimal interest rate rule in the multi-stage monopolistic new Keynesian sticky price model is suboptimal in this context;(6)Even so,the relative welfare loss based on the sticky information theory is still less than that in the sticky price model when implementing the optimal interest rate rule including inflation of each production stage,which is another intuitive evidence that the sticky price theory is dominated by the sticky information theory under the interest rule.