Cointegration Analysis With Structrural Break Between Foreign Direct Investment And Inflation In China

After the reform and opening, introduction of foreign direct investment in China's external trade and economic relations is an important part and a significant reform period of China's reform and opening.It plays an important role in making up investment shortage in reform period, promoting economic growth, introducing foreign advanced technology and equipment, and developing external trade. With the continuous deepening reform and opening,the scale of foreign direct investment in China expands gradually.FDI has become the main motive power of economic growth in China, and influeces our country's economy more and more deeply. On the one hand, foreign direct investment plays an unreplaceable role in China's economic development.On the other hand, the scale of foreign direct investment expands unceasingly also produces some negative effect. The scale of foreign direct investment increases rapidly, foreign trade grows at the same time, and trade surplus expansive speed becomes fleetly,bringing rapid expansion of foreign exchange reserves and the excess liquidity, gradually become China's inflationary pressure new factors,causing excess liquidity.Therefore,in recent years more and more people pay attention to relationship of FDI and domestic inflation.At present, many domestic scholars have studied effect of FDI promoting economic growth,and some scholars in China have studied the relationship between foreign capital inflow and inflation.However,few scholars have studied the relationship between FDI and inflation in China and have not analysed and checkout relationships between FDI and CPI comprehensively.Based on the summary of FDI impacting domestic inflation and the research of cointegration structural break, this paper analyse the relationship between FDI and inflation in our country in-depth. This analysis mainly uses the qualitative analysis and quantitative to analyse methods.Qualitative analysis mainly analyses the transmission mechanism of FDI affect CPI.Quantitative analysis analyses cointegration and cointegration structural break relationship between FDI and CPI,and mainly studise the relationship of structural break cointegration. Cointegration structural break problem is a new area in econometric,and also is an important question in time series analysis,which attracts more and more scholars' attention. Cointegration structural break analysis is a new method which reflects changes of economic relation and economic structure and long-run equilibrium relationship in economic system. Some important events would impact economic system,and change the data structure which describes economic variable time series. Particularly,at present,our country is in the period of economic reforming,during which economic modle would change along with transformation of economic system and change of political system, Cointegration structural break analysis can reflect economic problems accurately and timely.In this paper, we use foreign direct investment and consumer price index are annual data from 1983 to 2009.Based on this,using the Granger causality test, cointegration test and cointegration structural break test and so on,combining with EVIEWS analysis software,I research the quantitative relationship of FDI and inflation in our country. This study shows that foreign direct investment is one of the reasons of inflation in our country, but also one of the promote factors of domestic inflation.There is positive correlative relationship between foreign direct investment and domestic inflation,that is to say growth of foreign direct investment will promote domestic inflation, There exist cointegration relationship between FDI and CPI,it means that there is long-term equilibrium relationship between them.But a change of the long-run equilibrium relationship took place in 1999, namely between FDI and inflation existing cointegration structural break relationship.This cointegration structural break relationship between FDI and inflation manifests intercept, trends and slope all changed.Studying on FDI effecting inflation of our country after reform and opening have very vital significance by using foreign direct investment to develop our country economy further. Stimultaneously,studying the relathionship between FDI and inflation makes for understanding the function of foreign capital correctly, helping the government to formulate correct foreign policy, providing some refernce for introducing FDI reasonably and controlling inflation.Therefore this research also has certain policy guiding.This article researches relationship between foreign direct investment and domestic inflation, and also introduces theory and method of cointegration structural break,but it is not only a simple analysis of the relationship between them from a theoretical perspective,nor researches cointegration relationship between them purely. In consideration of the impact of external factors, such as major economic policy and institutional change, major political change occurs,major technological revolution and technical innovation, the impact of these factors could lead to economic structure change. So the cointegration relation between them may change. The conclusion of the result in this paper proves this point, after the southeast Asian financial crisis in 1997, domestic and international economic situation transformed,the cointegration relation between FDI and CPI changed after 1999.At the same time,according to the results of analysis model,we judge this structural break for intercept,trends and slop changed simultaneously.This is one important innovation in this paper.Of course,there still exist some disadvantages.First of all,before the China reform and opening,amount of foreign direct investment are very few,and there also aren't corresponding record. So the data after the reform and opening are available.The data in the statistical yearbook from 1979 to 1982 is a sum so it doesn't have practical use values.Therefore,in this paper we use annual data from 1983 to 2009. So there is a question about the length of statistical data, it may influence the study. Secondly, this paper is using progressive inspection examine change point and unit root of cointegration structural break.However, considering the length of data,this paper only considers one structural break point. But actually,in economic society, there may be two or more structural break points. It should be considered in future researches.