The Impact Of External Shocks On China’s Public Inflation Expectations

Since the21st century, with the deepening of economic globalization, China’seconomy is more and more external dependent, so the influence of external shocks onChina’s economy is also increasingly apparent. In view of external shocks in recentyears, intensified and the high level of public inflation expectations, this paper is tostudy whether external shocks are sensitive factors of public inflation expectations,and of them which is more important, also the transmission mechanism and degree oftheir influence on public inflation expectations. Finally, this article gives advicesbased on the empirical conclusion, in order to provide theoretical basis and empiricalsupport for central bank to manage inflation expectations and set policy.Beginning from the external shocks theory, this article find out internationalenergy prices, food prices and the international hot money as indicators partly fromthe physical economy and virtual economy of typical performances of external shocks.Using the difference method and probability method based on normal distribution,uniform distribution and logistic distribution to calculate inflation expectations of thepublic by using the survey results about depositors from2011to2013.This articlemakes an empirical analysis of the mechanism for the formation of inflationexpectations. Empirical study shows that calculated public inflation expectations byusing four methods mentioned in this paper are quasi rational expectations. Therefore,this article introduced the new Keynesian Hybrid Phillips curve which is based onrational expectations and sticky price to study the effects of external shocks and otherfactors that affect the inflation expectations. Also, this article establishes SVAR modelto depict inflation expectations and external shocks. Finally, Empirical study showsthat international hot money has the largest impact on inflation expectations in theexternal shock variables, however, the international energy prices and food pricesaffect significantly on inflation expectations but smaller.At the end of the paper, some advices are proposed such as guiding inflationexpectations reasonably, optimizing international hot money management system and the primary product strategic reserve and so on.