Research On The Welfare Cost Of Inflation In China

Chinese economy has suffered a severe test since the global financial crisis in2008. The macro-control ability of central government was also under a severe test. From two years’economic show since the global financial in2008, Chinese macro-control has achieved great results. But this stage of economic recovery has also brought many negative effects and problems. The inflation problem has become the people’s most concern. From the Statistical data of CPI these years, We can see that the inflation rate in the first half year of2008amounts to7%above and declines in the second half year. The inflation rate is negative in2009because of the impact of financial crisis. Since the second half of2008, Many countries have taken active measures to intervene the economy and rescue the market. The global economy also begins to recovery.With the recovery, the inflation problem is becoming more and more concerned by people. The inflation rate climbed from1.5%In2010January to6%above. It didn’t decline until the national macro-control worked. Inflation causes reduction of people’s real money balances, but the moderate inflation rate will increase output and promote the rate of employment. A problem that how much the inflation affects people’s life caused is the welfare cost of inflation.There are important theoretical significance and practical value in study on the welfare cost of inflation. Firstly the article summarizes the welfare cost of inflation theory and mainly introduces the current major measuring model and method of inflation welfare cost. Summary is from two aspects:traditional monetary demand theory and modern monetary demand theory with micro foundation. In the aspect of traditional monetary demand theory, the article introduces the method of consumer surplus on the welfare cost of inflation measurement. In the aspect of modern monetary demand theory with micro foundation, the article mainly introduces these research on the welfare cost of inflation:(1)estimation of the welfare cost of inflation based on money in utility model,(2)estimation of the welfare cost of inflation based on shopping time model,(3)estimation of the welfare cost of inflation based on cash in advance model,(4)estimation of the welfare cost of inflation based on the money search model. The article also introduces the domestic research on the welfare cost of inflation. In this paper, we use the annual economic data of China from1992to2010to estimate Chinese monetary demand function. The paper gets two forms of currency demand function-semi-log monetary demand function and log-log monetary demand function. The paper estimates the welfare cost of inflation of19years in China by the method of consumer surplus with two kinds of monetary demand function, and compares and analyzes the different results. The results show that two kinds of monetary demand function lead to of different estimated results. The differences are found in the analysis that the double logarithmic monetary demand function is more close to the economic situation in china.we use money in utility model to estimate the welfare cost of inflation of China under log-log monetary demand function. With comparison of the results of different methods, the paper gets conclusion that the results of the consumer surplus method and money in utility model tend to be consistent. The results derived from the the consumer surplus method is a little smaller than that of money utility model.The results of this study shows that welfare cost of inflation is smaller than we imagined. The results can also provide policy makers a reference to policies against inflation.