Studies On The Relationship Between Inflation And Fixed-assets Investment In China

Inflation is an important index which can reflect stabilization of Macro-economy. Higher inflation rate can cause the redistribution of income and wealth, distort relative rice of commodities, reduce the efficiency of resource allocation, as well as trigger the bubble economy to damage country's economic base and the basis of political power. Fixed-assets investment is an important component of the national economy, the appropriate fixed-assets investment can be effective in promoting the steady growth of the national economy. While the excessive growth of fixed-assets investment, will lead to overheating of the economy and further inflation. Therefore, Chinese Government has always attached great importance to the balance of fixed-assets investment and inflation, whether the expansion of domestic demand after the Asian financial crisis, or 4000 billion stimulus plan to deal with the international financial crisis, are making use of the leverage of fixed-assets investment to get rid of the state of economic contraction.The paper systematically studies the relationship between inflation and fixed-assets investment with modern econometric model. First of all, we analyze the theory relationship between inflation and fixed-assets investment, through the four-cycle analysis of inflation and fixed-assets investment shows that the inflation rate and growth rate of fixed-assets investment by turn increase, they influence each other, their relationship is very close. And then, the paper begin to probe into unit root test on inflation rate and fixed-asset investment growth rate with ADF and PP test. The test results show that the two sequences are first-order integration, it means that may be the cointegration relationship between inflation rate and fixed-asset investment growth rate. So the paper continue to probe into JJ cointegration test between inflation rate and fixed-asset investment growth rate, and error correction model was established. JJ cointegration test results show that there is a long-term and stable relations between the inflation rate and growth rate of fixed-asset investment, then we amend short-term relationship of the two sequences. In order to discuss the causality between the two sequences, using Granger causality test, the test results show that the two-way causality between the inflation rate and growth rate of fixed asset investment exist. In the paper, impulse response functions and variance decomposition of inflation rate and fixed-asset investment growth rate was discussed, the results of the discussion show that inflation rate is affected by itself and fixed-assets investment growth rate are great, whereas the growth rate of fixed-assets investment mainly is affected by itself. Finally, the paper gives the conclusions and policy recommendations.