Testing The Effectiveness Of The Control Over The Uncertainty Of Inflationary Expectations By China's Monetary Authority

The impact of inflation over the social economic environment of a country is one of the core questions in macroeconomic theory. Most recent advances in inflation theories have suggested a marked emphasis on the role of the expectation of inflation and the uncertainty about inflationary expectations. As empirical evidence shows, these two factors have exerted a great influence on inflation processes during China's economic reform.In the view of mainstream international economic academia, an efficient monetary policy must emphasize the control of public inflationary expectations so as to prevent tendencies that can potentially aggravate macroeconomic environments. Thus considerable social costs associated with "ex post" remedies to inflation processes that have already happened can be avoided. The motivation of this paper is to highlight the significance of controlling the variation in inflationary expectations, given that a key feature of the public expectation about inflations is its uncertainty.The paper quantifies the uncertainty about inflationary expectations through an econometric model (ARCH model), and tests whether the Chinese monetary authority was effective in commanding the uncertainty about inflationary expectations during the period of 1996 and 2004. It captures the effect of monetary policy through both the indirect approach of an empirical study of the statistical and logical relationship between actual inflation rates and the uncertainty of the expectations, and the direct approach of dynamic analysis of the correlation between the uncertainty of inflationary expectations and the variation in the growth of monetary supply. It is proved that the Chinese monetary authority could not command the uncertainty about inflationary expectations effectively during the 9 years. The paper concludes with several suggestions with regard to effective controls of the uncertainty in inflationary expectations.