China 's Inflation From The Perspective Of Fiscal Policy

Fiscal policy determines the price theory(Fiscal Theory of Price Level, referred to as FTPL theory) proposes an opposite view to monetary doctrine and new classical macroeconomics. The price level is not determined by monetary policy, but determined by the fiscal policy. The theory states that there is no necessary relation between money supply and price in reality, monetary policy cannot well explain inflation. FTPL theory for the first time explains inflation from the view point of fiscal policy. The traditional quantity theory of money is rediscussed from the policy mix and regime perspective, so as to review the price level decision theory.In this paper, We analyse Chinese inflation from the perspective of fiscal policy based on FTPL theory. Firstly, we begin with the theory of FTPL simple literature review, from a theoretical point of view that expansionary fiscal policy does have the effect of inflation. Then based on the situation of reform and opening up, we reviewed Chinese inflations that occurred several times over the past thirty years. We find that Chinese fiscal policy does play a decisive role in inflation determination. Empirical analysis confirms the fact that China is more likely to have a regime of Non-Ricardian, which means fiscal policy dose play a decisive role in price determination during that period. However, the financial crisis happened in 2008~2014, the Chinese fiscal policy is closer to the Ricardo regime, which means the monetary policy plays a decisive role on the price level.As to the empirical method, we apply the revised method put forward by Canzoneri, Cumby and Diba(short for CCD) to judge Chinese policy regime. By the way of HP filtering, we get the structural surplus and cyclical surplus data. Then we apply three variables VAR to test the adaptability of FTPL in China.In conclusion, We find that the Chinese 1979~2012 price is determined by fiscal policy, while during the financial crisis in 2008~2014, the price level is determined by monetary policy. Finally, we conclude that it is better to have passive monetary policy with positive fiscal policy when the economy is stable, but during the financial crisis we should adopt a moderately expansionary fiscal policy and monetary policy, and stop “Anti crisis tool” at right time.