External Factors That Affect Inflation

Inflation has always been a main concern in the field of economics and finance. With the globalization and localization of economy, research on it has gradually been put under the circumstances of open economy.This thesis focuses on the external causes of inflation.The external causes which influence inflation of our country studied here cover:Balance of Payments, international primary goods'price, foreign exchange rate, interest rate together with relative price variability. As far as the Quantity Theory of Money goes,inflation is always and everywhere a monetary phenomenon. Over-supply of money results in inflation, based on which the thesis chiefly works on two variables in Balance of Payments: foreign assets of monetary authority that changes base money and net foreign assets that influences money supply. Further more, the case study on factors like import and export, foreign exchange reserves, foreign assets of monetary authority and net foreign assets helps to prove the close affinity between our CPI and foreign assets of monetary authority together with net foreign assets. Apart form the positive correlation, there also exists Granger causality between CPI and the latter two.The increasing price of raw materials has strengthened the necessity of research on relationship of our inflation and international primary goods. Among all the elements, commodities index which can reveal the holistic change is principally investigated here. Nowadays empirical analysis fails to show the clear correlation and Granger causality between international primary goods'price and CPI of our country. The thesis argues that two reasons can be found to explain such a phenomenon. One is the insufficient transition from PPI to CPI; the other is the low proportion of raw materials and energy sources in our CPI, which only occupies 3 percent, compared with that of the developed countries that is...