Welfare Cost Of Inflation In China

Today everyone pays attention to the inflation, as it will cause welfare cost. The inflation welfare cost mainly means more daily spending, more none-productive trade, less purchasing power of currency, the devaluation of treasure, unreasonable relocate of wealth, and unreasonable tax change and so on. Improving people's welfare is one of the final targets of every government. As inflation will cause welfare cost so every country in the world attaches great importance to macro-control of inflation. Before making the macro-control policy, the inflation welfare cost must be measured first. This paper will study China's inflation welfare cost using the foreign literature and domestic ones for references. After studying the inflation welfare cost, I hope that it can give some useful consultant for China's government to make more rational macro-control policy.The study of this paper contains four chapters. The first one is introduction: this chapter gives the background, theoretic sense and practical sense of the issue of inflation welfare cost. The second one is the literature review: this chapter reviews and analyses the foreign and domestic literatures. The third one is empirical analysis: this chapter analyses the characteristics of inflation from 1979 to 2008.I estimate the welfare cost of inflation from 1979 to 2007, supposed that the inflation level remains the same. Then, I estimate the welfare cost of inflation from 1979 to 2007, which was caused by the fluctuation of inflation. The fifth chapter is conclusions and policy suggestions. This chapter summarizes the above chapters and then makes suggestions on controlling the inflation rate to reduce the inflation welfare cost.Innovations and shortage of this paper are described as below. This paper has three main innovations. The first one is that I developed the traditional shopping-time model. I added the interest revenue of money and economic development rate into the model to make it fits Chinese economic situation. The second one is that I estimated the inflation welfare cost caused by the fluctuation of inflation. At present, most researches on the inflation welfare cost calculate the cost when the inflation level remains the same and pay little attention to that when the inflation is fluctuating. But in the real economic system, the inflation's fluctuation is significant. So the inflation's fluctuation must be taken into account when estimating the inflation welfare cost. The third one is that I analyses the impacts on inflation of different macro-control policy tools comprehensively. At present, most literatures studying the effects of monetary policy and monetary policy tools of inflation are focused on different directions and signals of the policy tools, whereas the comprehensive analysis on different policy tools are limited.The shortage of this paper is as followed. As it is necessary to make estimation of relative parameters when calculating the cost, the subjective estimation will affect the veracity and reality. Besides, there aren't yet any criterions on parameters estimation in our country and the existing literatures are the only source to get parameters, therefore, the researches in this field need to be deeply developed.The main conclusions of this paper are described as followed. I concluded that the inflation welfare cost contains two parts. One part is the cost caused by inflation when it is stable; the other part is caused by the inflation when it is fluctuating. After analysing the inflation welfare cost comprehensively, the paper find out that the higher inflation level, the more inflation welfare cost, the more fluctuation of inflation the more welfare cost. In order to reduce the inflation welfare cost the government should lower the inflation level and avoid the fluctuation of inflation. When using macro-control of monetary policy the government should make sure that different monetary policy tool does not conflict. In order to lower the inflation level smoothly the government should use the macro-control of monetary policy tool step by step.