Research On The Impacts Of Domestic And International Inflation Shocks To China’s Macro Economy

In recent years inflation has always been a difficult for the government. Toevaluate the impacts of inflation to China’s macro economy and raise some proposalis becoming very important. What are the impacts of international inflation and thedomestic inflation? To answer these questions, we build up a SVAR model includingthe international commodity price, the federal fund rate and some Chinese mainmacroeconomic variables and use standard impulse response function and variancedecomposition technology to analyze these two questions. Our findings are asfollowing:Firstly, the domestic inflation has a much quicker transmitting speed thaninternational inflation. All variables would reach to its top or bottom19months afterthe domestic inflation shocks, that’s much earlier than international inflations shockswhich has spend24months.Secondly, international inflation will greatly improve China’s domestic inflation.When the international commodity price index increases1%, the accumulated changeof CPI would be1.5percent.Thirdly, a1%rising of international inflation would cause accumulated changesof the following variables:0.41%rising of import,0.46%rising of export, and0.23%falling of Shanghai composite index in the following four years.1point increase ofCPI would cause accumulated changes of the following variables:0.34%falling ofimport,0.49%falling of export,0.15%falling of M2and0.18%falling of fixedassets investment in the following four years.Fourthly, the international inflation has little impacts on GDP and M2and FAIafter four years, the domestic inflation has little impacts on Shanghai compositeindex.Fifthly, the international shocks contribute a big proportion of China’s economicvariation. For most economic indicators, in the third and fourth year after the shocks,the contribution of international shocks to variance is30%to40%. International inflation contributes over20%of all domestic variables’ variation except M2, butdomestic inflation can only explain over20%of variation for M2and CPI.The results mention us that to avoid the risk of international inflations shocks,for fuels, we should find more oil providers and improve energy efficiency, fornonfuel, we should try to hold the pricing right. Meanwhile we should reconsider themonetary price targeting mainly on CPI.