A Study On The Determinants Of Inflation From The Angle Of Fictitious Economy

Inflation is not only an important indicator to reflect the situation of national economic operation, but also an important economic phenomenon closely related to people’s lives. To stabilize prices or to control inflation is seen as one of the most important goal of monetary policy in most countries. In September this year, China’s CPI rose1.9%, the first three quarters of the CPI rose2.8%. In short, the overall price situation is well controlled. However, since the United States launched the quantitative easing monetary policy, the euro area and Japan also implement a loose monetary policies, China will face greater pressure of imported inflation. So, in October14,2012, the People’s Bank of China Deputy Governor Yi Gang would repeatedly emphasized’to control inflation is a top priority for the central bank’in his lecture of the IMF World annual meetings.First, this paper introduces the main inflation theory, including the monetarist quantity theory of money, the Thornton-Wicksell model and the New Keynesian cost-push model. Then, from the perspective of fictitious economy, this article creates the new inflation model on the basis of traditional quantity theory of money. On the basis of economic data from January1998to June2012, this paper analyzes the determinants of inflation by the use of vector autoregressive model (VAR) from the fictitious economy point of view. And the results show that the money supply, the actual industrial added value, and the fictitious economic variables such as stock turnover, bond turnover, and real estate turnover play a strong role in the interpretation of China’s inflation. The liquidity of the whole society is allocation and two-way flow between thereal economy and the fictitious economy from the view of the entire economic system. Inflation as measured by the consumer price index (CPI) simply reflects the excess liquidity in the real economy. To suppress inflation in the real economy, monetary authorities can not only tight monetary policy but also lead the excess liquidity from the real economy to the fictitious economy such as stock market, bond market.The policy implications of this paper will be in this:When facing huge inflationary pressures, monetary authorities should not only reasonably tight money supply but also analysis the distribution structure of the liquidity in the real economy and fictitious economy. And monetary authorities also should guide the flow of liquidity in the real economy and fictitious economy depending on the circumstances, In addition, the stock market and the bond market are good fund reservoir. That is to say, it has a very active role in controlling inflation that to improve the stock market and the bond market to become effective investment and financing establishments.The innovation of this paper is to extend quantity theory of money on the basis of previous large study and then build the inflation model from the angle of fictitious economy. Then, this paper tests the model on the monthly data from January1998to June2012in China. The findings coming from a new angle not only support previous results but also infer new conclusions.The inadequacy of this article is that the inflation model doesn’t include an important psychological factors affecting inflation-inflation expectations. This remains to be further studied. In addition, what is the each specific impact on the whole economy from tightening monetary policy and leading excess liquidity to fictitious economy? And which economic consequences are better? This also need to be further studied.