Analysis Of Internal And External Factors Affect The Volatility Of The Overall Price Level In China

As the major development of world economy and the reform and openness of Chinese economy,the domestic economic fluctuation is becoming more correlated with the business cycle of world market.On the other hand,the macroeconomic policies especially the monetary policy also plays a more important role in the price determination.In this article,we reviewed the theoretic and empirical evidences of how to explain the general price fluctuation in our country,and tried to find the specific sources and mechanics of inflation and deflation in the recent years in China.The past decade witnessed the drastic fluctuation of general price level in China. As is known,price fluctuations are always related to the external shocks such as the world commodity price fluctuation and exchange rate,and the internal supply and demand conditions as well as the monetary policy.This article examined the specific external and internal factors that influence the prices in China and their relative importance,through the theoretic modeling and the empirical tests of a VAR model. Our conclusion is that the most significant factor is the CPI lagged variable as a representation of inflation expectation.The commodity price only influences in the short run while the exchange rate and monetary policy impact in the long run.