The Inflation And Deflation Effects Of Monetary Policy

Inflation is the core theme of community of the economic theory. The causes and the development of the inflation are closely related to stable and rapid economic development and people's living standard in China. So inflation is our government's key indicators which affect demand with fiscal policy and monetary policy. Macroeconomic policy measures by the Government to actively control began in Keynes. Keynesian theory holds that the government should adjust aggregate demand with fiscal policy and monetary policy, and then reach certain economic goals. Regulation of the economy with monetary policy is mainly based on the intermediate target of interest rates and money supply to intervene in the macroeconomics. The behavior of active policies to regulate the economy makes the economy of western countries a continued and stable development.Monetary policy has been an important means to regulate economy by governments. Money supply and interest rates have long been the intermediate targets to control inflation or deflation and achieve the goal of economic growth established in China ultimately. Money supply combines the three tools of the deposit reserve ratio, open market operations and the discount rate with the ultimate goal. Therefore, money supply concerns for better prevention and control of inflation or deflation are important.This article analyzes quantitatively under what monetary policy will occur inflation and deflation, and the percentage change of money supply and interest rates in the percentage change in the inflation rate. It should be said theoretical circles at home and abroad have done a lot of research 0f the theory of inflation, obtained fruitful results. But this problem is so complex that domestic and foreign scholars have not get certain conclusion on the relationship between monetary policy and inflation. The uncertainty of inflation is significant, its formation, causes and fluctuant features lead economists to explore and break. So this article still object on fluctuation and causes of inflation, focuses on the effects of monetary policy on inflation problem.First we introduce the meaning and measurement of inflation targets, the basic classification of inflation the traditional theory of the causes of inflation, and the research related to the theory of inflation at home and abroad. Finally, we introduce the main content and structure of this arrangement. We introduce the intermediate target theory of monetary policy and the current selection to be proposed. Then it gives four different stages and opinions of inflation by economic schools. That is the classical school of economics, Keynesian school of economics, neo-classical school of economics and the new Keynesian school of economics.The research method of effects of inflation and deflation that gives under the monetary policy is the theoretical model we mainly introduce used in this article, which is state space model to quantize monetary policy and inflation. That is, the model which problems of the effects of the percentage change in money supply and benchmark rate on the percentage change in inflation or deflation rate choose.The empirical analysis of the monetary policy effects on inflation and deflation and the varying parameter state space model, including the data sources and preprocessing, X12 seasonal adjustment to process variables, unit root test and cointegration test. After preparation work is done, the state space equation of inflation to observe that how the intermediate target of the money supply and interest rates of the monetary policy affect on inflation and deflation. In summarize of the whole article by analysis of the whole text, it can be concluded as follows:In real life, quantitative analysis of effects on inflation or deflation under easy or tight monetary policy is important. This article tests time series path of inflation rate based on the state space model. The results show that our interest rates, exchange rates and the change of money supply rate on inflation rate have certain contributions. Interest rates and money supply as the representative of monetary policy on inflation and deflation have certain effects. The empirical analysis, the appropriate monetary policy in China does have a certain impact on inflation and the specific range of inflation with the fluctuations of money supply, interest rate and exchange rate.State space model is established by money supply, interest rate and exchange rate elasticity, there are dynamic effects on the inflation rate. Money supply elasticity has a significant negative effect and a strong fluctuation in the Southeast Asia crisis of 1997; interest rate elasticity has a counterproductive impact on inflation, but the effect level of interest rate elasticity than money supply has a certain lag and is even more intense to external shocks; exchange rate elasticity on inflation rate is the largest interval with the effect of the highest level of close to 1 during the financial crisis. In summary, the paper argues that monetary policy should remain concern about money supply, while take interest and exchange rate into account to control aggregate demand with monetary policy and maintain stable price levels. Inflation should be prevented to avoid economic losses and even social unrest.