Empirical Research Of Chinese Inflation Rate And The Uncertainty Of Inflationary Expectations

Inflation is a cosmopolitan economic problem, and an important factor affecting the running of economy system in either country. So it is a realism significative research thesis to research the impact of inflation over the social economic environment of a country and find out how to restrict inflation. 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. There are many factors placing a premium on inflation, in which inflation prediction uncertainty is a very important factor. As empirical evidence shows, these two factors have exerted a great influence on inflation processes during China's economic reform, and inflation prediction uncertainty is more dangerous to the economy growth than the high inflation itself. 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. In this paper, I use modern macroeconomic theories and time series analysis to investigate our national inflation. I also conclude with some important proposals.The introduction mainly introduces the background and the meanings of this article.Chapter 1 in this article mainly introduces some basic theories about inflationary expectations and uncertainty. Such as, the concept , their development processing, and the relationship between actual inflation rates and the uncertainty of the expectations. All the theories are indispensable for us to understand the inflation.Chapter 2 lays out some important time series analysis models, which is the most important theoretical part. First, I introduce the testing methods used to differentiate stationary series and unit root series, i.e.ADF testing method and PP testing method. In section 2 of the chapter, I introduces some heteroskedastical theorectical models: ARCH and GARCH model. ARCH model is a particular form of the GARCH model. GARCH model is made up of a mean equation and a variance equation. The mean equation is as follows:This equation is used to describe the data producing process. And the conditional variance equation isBy using past realized volatility information and the already modified information, the conditional variance in GARCH model can describe some data producing processes with both stationary and volatile property.Section 3 introduces some expansion ARCH models, such as GARCH(p,q) and GARCH-M, which are symmetrical, TARCH and EGARCH, which are asymmetric. These models will be later used to simulate data.Section 5 introduces the Granger casuality testing theory to determine the. In a time series conditional, the casual relationship between two variables can be defined as: if the variable X can contribute to predict the future change of variable Y, then we can say the variable X granger cause the variable Y.Section 6 introduces the co-integration theory (a theory used to determine the long-run equilibrium relationship between two or more variables) and Error Correction Model (a theory used to determine the short-run relationship between two or more variables). All the time series models we introduce in the chapter are frequently used in the next two chapters.Chapter 3 is the key empirical part in this paper. By using macroeconomic theory and time series theories, this chapter analyzes the inflation rate and its relationship with the uncertainty of the expectations.In section 1, I choose the research range of time ,and do some basic handling with the data. I use the monthly year-on-year CPI from1995.01 to 2007.10 to obtain the inflation rate, then proceed to step seasonal adjustment, we get the basic seriesπt?.In section 2, I build and test the econometric models we need. First ,by using unit root testing ,I conclude our inflation rate is unit root process. So I use the difference series to analysis the casual relationship between actual inflation rates and the uncertainty of the expectations. After building mean equation as AR(3), the residual has ARCH effect. This tells us that we could build an ARCH model to simulate data. By comparison, EGARCH is the best. We get the seriesσt2 and its dynamic path. From the path, we can see the uncertainty of the inflation expectation is expected to continue an upward trend in 2007 with the public presence of higher inflation psychological expectations. According EGARCH models describe the impact of the message tell us, information on the expected impact of uncertainty caused by asymmetric impact.In addition, the Granger causality test results indicate that, for our country's inflation rate, the value of the former inflation rate can interpret and infer the uncertainty of the later inflation rate, whereas uncertainty of expectation has no significant influence on inflation. The uncertainty of inflation expectations and the fluctuations of inflation affect each other. The reason why high inflation led to the expansion of the expected inflation uncertainty lies in the suspicion of people on the government's monetary policy which result in the increase in the volatility of inflation, when the high inflation comes.On a basis of the analysis of the relationship between inflation expectation and inflation uncertainty, this paper draws a conclusion that, to a large extent, the level of inflation linked to the uncertainty of expectations. The expectation stability of people and maintain a low inflation environment are expected to become the important means for central bank to reduce the uncertainty of inflation.