Study Of Inflation Rate And Economic Growth Based On Mixed Frequency Model

Relations between inflation rate and economic growth have been a heateddiscussion in Microeconomic operation and study. Keynes first put forward a theoryabout relations of positive correlation between inflation rate and economic growth.However, based on many economic realities, many scholars believe there also arenegative correlation and without correlation. So far, they have not reached a sameviewpoint. As Chinese economic structure reform increasingly developed, to stabilizeprices and to keep growth upward become the most important things in China. Alsorelations between inflation rate and economic growth have been a heated discussion inMicroeconomic study. In another words, the study of relations between inflation rateand economic growth is of importance in both theoretic and real world field.This article concentrates greatly on relations between inflation rate and economicgrowth, trying to get some conclusions, such as whether they have significant effectson the other and how much would the effects influence others. Because Grangercausality test and VAR are both useful tools in the study like this, this work, based onthe past references, quarter frequency data of real GDP index year-on-year growthrate, CPI and PPI index year-on-year growth rate, and M2 index year-on-year growthrate, and on the two methods, explains the relations between inflation rate andeconomic growth preliminary. Among conclusions, the results of Granger causalitytest show that inflation rate can Granger explain economic growth, while economicgrowth can contribute to explaining inflation a little. VAR’s response function showsthat there exists correlations between inflation rate and economic growth, whoseinfluencing effect should be determined by the magnitude effects of impacts.As it is stated above, inflation rate indexes are at month frequency whileeconomic growth rate is just at quarter frequency. The traditional means ask for thesame frequency, as we must abandon some data information. To avoid the informationlosing and make the most use of data observed, we use Bayes methods to constructMF-VAR model to deeply study relations between inflation rate and economic growthusing all data which can be observed. Meanwhile, these means are different from theprevious researches. Compared with VAR model only at same frequency, MF-VAR estimates much better. In new model, results show that there is just one way torelations between inflation rate and economic growth, meaning that only inflation canaffect growth. This result agree with the temporary background that inflationaccelerate growth in China. But, economic growth has less functions to explaininflation. We can even assume from the results that M2 may have greater effects oninflation.From empirical research, we have three thinkings about the methods and results.Firstly, MF-VAR has a much better effect in parameters estimating than VAR at samefrequency does. This mainly lies in the reduction of posterior variances estimating andthis reduction results in response function more precisely estimating. Using this bettermethods, we give some political advises, including how to handle inflation and howto use inflation policy to increase growth. At last, we give three solutions on theresearches like this: using more available data and information; employing moreprecise estimating methods; adding some applied and real mathematic economicmethod as a foundation.