A Study On Formation Mechanism Of Chinese Inflation In Recent Years

Since the reform and opening-up of China, the rapid economic growth has been always accompanied with relatively large macroeconomic fluctuations. In particular, the inflation phenomenon is quite common. Not only the related government departments pay attention to the inflation problem, but it has also been discussed as the hot issue by the economists.The time span of this paper studied on the problem of inflation started from the first quarter of 2007 to the second quarter of 2008. What the latest inflation phenomenon differ from the past is that it is accompanied with increasing prices of international and domestic agricultural commodity. Firstly, we summarize the relevant inflation both at home and abroad, focusing on the structural factors and monetary factors which caused inflation during this time.Secondly, according to the three assumptions of the structural inflation theory, we find it not valid that the rise of international commodity price contributed to the inflation. Then we use the relevant data of import and export of agricultural products and the agricultural labor productivity, in order to test the structural inflation theory. It showed that this theory also does not hold in the process of the current round of inflation. Studies suggest that the structural inflation theory is not consistent with empirical data of recent years, mainly because the structural theory of inflation does not take monetary factors into consideration.Thirdly, we take the impulse response method and further discussed the relationship among broad money supply (M2), GDP deviation and inflation rate. Then, we conduct depth analysis of Chinese monetary inflation formation mechanism. Furthermore, we analyze the impact of the excessive of money supply and how the multiple goals of monetary policy cause the money supply out of control. Through the research of formation mechanism of monetary inflation, we believed that inflation is caused by money supply, which will increase the speed of currency in circulation. This will increase the aggregate demand to a higher level and bring greater inflationary pressures.Finally, this paper points out that the control of the money supply is the fundamental method to regulate the inflation. In the long run, only through further deepening the reform of the monetary policy transmission mechanism will we gradually lift the effectiveness of monetary policy constraining factors. And just only in this way can we curb the fundamental causes of inflation. In 2005, the People's Bank of China announced the exchange rate system reform, and this will contribute to the realization of the external balance and alleviate the money supply burden brought by the foreign exchange. In the long run, marketization of exchange rates and interest rates is the economic reform objectives, and is also the basis of more effective macroeconomic policies.