On The Causes Of Deflation In China And Its Countermeasures

Things are always correlative, so does economic phenomenon. Basing on a common correlative view point, this dissertation names that deflation is in the monetary economy era an economic phenomenon in stead of a monetary phenomenon, and it is an all-in-all reflection of the economy.This three-chaptered article views the recent deflation in a macro framework and tries to locate the cause of this uneasy matter and explore ways for ending it, in consideration of economy recovery and living standard enhancement.Chapter one begins by introducing the functions of money, showing that money affects the economy differently when it performs different functions, and that it is that part of money which acting as Store of Value that initiates deflation. After defining deflation, this dissertation employs the AD-AS Model to illustrate the mechanism of price decreasing and deflation, and then describes the relationship between deflation and economic growth and monetary supply.Using the macroeconomic analysis framework, this dissertation details various factors that causing deflation, in which, the depression of consumption, investment, government purchases or net export weakens effective demand while improved production capacity, ill-structured production and eased administration creates oversupply. Financial factors such as a low efficiency financial system or fail of monetary policy can also results in deflation. In addition, deflation can spread worldwide because of the development of international trade and finance activities.The aftermath of deflation is depicted that after. Owing to deflation, money is preferred as its price increases relative to other assets. The tendency of investment goes down as the cost and revenue of it does so, and consumption is proponed, both are hurting economic growth. Deflation can also affect the allocation of wealth between members of the society through income effect, so much so that to corrode the banking system by bad debts.Chapter two devotes to explain the situation of recent deflation in our country. Controversies of economists are displayed firstly. Some, grouped as the supply-demand ill-equilibrium argument, holds that low-leveled repeated investment in our country leads to structural overproduction, which in turn brings about the ill-matched selling and buying. The monetary recession viewpoint argues that the deflation is caused by a tightened monetary policy, and that a credit contraction leads to economic inactiveness, which lows down the general price level. The system transformation thesis claims that the common people lost some of their ability of consumption because of taking up the cost of recent transformation. The structural contradictory argument indicates that structural contradictories in the economy are the crux of deflation as the contraction inertia argument proves that the deflation comes side by side with the cure of inflation. Then, we have detailed data that figures out our situation of deflation. In this five-year-long period of deflation, we have got economy growth, but what we still have to mind is that we have got agrowth recession in which the growth of investment and consumption are going down.As to the particularity of the deflation in our country, this paper emphasizes that income differences is of most importance to the short of effective demand. The income differences in our country take forms as urban-rural difference, regional difference, professional difference, etc. These differences, legal or illegal, restrain domestic investment and consumption. A big rate of unemployment is another knotty problem that contributes to the deflation. With a large unemployed population, which mostly contains poor-educated, unprofessional ones, it is surely to have a low level of effective demand.Chapter three discusses policies dealing with deflation in our country. As the common tools of curing deflation, expansive monetary policy and fiscal policy are usually of best choices. Increasing the supply of money will ra...