| Inflation is one of the most common and sensitive economic phenomenon in the macro economic operation, which not only can lead to distortion in market prices, but also may cause devaluation of the currency, which thereby undermines the entire market operation mechanism.Therefore, maintaining price stable and curbing inflation turn to the primary target of monetary policy. Since the reform and opening up, China has suffered six inflations, and each inflation has a bad influence on the development of the national economy. In order to achieve the expected target of price stability, for each inflation, the central bank has taken a different monetary policy.This paper gives qualitative and quantitative analyses of the cause of these inflations and the availability of monetary policy in controlling inflation, which aims at providing the policy makers with theoretical support for their policy making, and ensuring the steady and rapid economic development in our country.Firstly, we review the related theories about inflation and monetary policy, so as to provide theoretical basis for later empirical research.Secondly, we give the qualitative analyses of the cause, characteristics and effect of the monetary policy for previous inflations, and further theoretically discuss the relationship between monetary policy and inflation.Thirdly, on the basis of qualitative analysis of the relationship between inflation and monetary policy, we apply one econometric model to quantitatively analyze the effect of monetary policy in dealing with inflation. The variables that we select to represent the monetary policy include:quantitative instruments-money supply (M2) and the total loans of all the financial institutions (LL); priced instruments-the rate for one-year loans of financial institutions (IR) and the legal reserve ratio for large financial institutions (RR). And we use the consumer price index (CPI) as the indicator of inflation. Considering the availability of data, this paper selects the monthly data between January1996and December1996to establish a vector autoregressive (VAR) model. The results of the cointegration test, granger causality test and impulse response function analysis show that there is a stable co-integration relationship between the inflation and the variables that represent the monetary policy. Also, the money supply is the main one among all factors which affect inflation, and the influence has lagged effect which shows most obvious in the third order. Meanwhile, there is a two-way granger causality relationship between the monetary supply and inflation. The influence to inflation from the total loans of financial institutions does not emerge until the lagged12th orders, and granger causality test also shows no causal relationship between credit quotas and inflation, this indicate that credit transmission channel of Chinese monetary policy is blocked. With regard to the priced instruments of the monetary policy, the lagged1st orders of both the IR and RR have apparent effect on inflation, but the effect is positive, this means that the price level will still rise even if we increase the LL and RR. So the phenomenon of price mystery is proved to be existed in the transmission effect of Chinese monetary policy.Finally, through the qualitative and quantitative analyses of the relationship between the monetary policy and inflation, we offer some suggestions to the central bank about how to increase the effectiveness of monetary policy. From the perspective of improving the effect of monetary policy, make sure to optimize related system construction, ensure the independent of the monetary policy from the central bank, and further advance reform of the reserve requirement system. From the perspective of improving the effectiveness of monetary policy transmission, further promote market-oriented reform of interest rates actively and steadily, improve the governance structure of commercial Banks, and strengthen the coordination between the monetary policy and other macro-economic policies. |
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