The Research On The Influence Factors Of China Inflation Under The Framework Of The Taylor Analysis

Since21st Century, the domestic price level of China went through several upsand downs, and even touched the apex in2007. At the same time, as we see, after theentry of China into the WTO, the opening degree has been increasing; In July2005,theRMB exchange rate realized the free floating reform; In addition, the nationaleconomy which is lasting the strong growth momentum at the end of the last century,continues to maintain the rapid growth of almost two digit; While monetary policyauthorities continue to promote the process of interest rate to become marketable, andstrengthen the policy power of interest rate to regulate the domestic price level. In thismacro economic situation，which factors influence China inflation, how Nationalregulatory authorities to manage the complexity and diversity of inflation is anunresolved question. In view of the Taylor rule in the form of open economy, we do aresearch about relationship between interest rate, exchange rate, GDP and inflationthrough Empirical model. We hope put forward some advice and reference forChina’s regulatory authorities. This paper first reviews the researches at domestic andoverseas on the Taylor rule as well as inflation and its influence factors. And thenbriefly introduces the theoretical basis of the rule of Taylor and inflation and itsinfluence factors. On the basis, this article using the1994January-2010Decemberdata to do an Empirical model which focus on relationship between interest rate,exchange rate, GDP and inflation. Using the method of comparative analysis, weinvestigate changes between inflation and its influencing factors before and after thereform of the RMB exchange rate system, reviewing the importance of Exchange ratein the macro economic environment. In the quantitative research, we analyserelationship between interest rate, exchange rate, GDP and inflation through vectorauto-regression model. The results show that: The reform of RMB exchange rateregime really strengthen the effects of exchange rate in the macroeconomicenvironment, improve its way impacting on inflation. And the process ofmarketization of interest rates achieved initial success, the channel through whichdeposit and loan interest rates effect on inflation has been dredging on a certain degree.While economic growth is still the main factor to explain inflation. Compared withother similar studies, we analyse two stages which is divided into before and after thereform of the RMB exchange rate system to compare the differences. In the empirical research, we made a multi factor model through the Taylor rule variant.In the selectionof data, we chose large span and high frequency monthly data to make the empiricalresults more accurate. The conclusions of the study have some theoretical and practicalvalue.