A Quantity Equation And Expectation About Inflation Of China Based On Threshold Cointegration

Although now China still maintained a high speed of economic growth, but the rateof inflation unemployment is also rising, and the growth of economic is slowing down. Soin the case of a lack of growth, how to develop the economic policies to stabilize theeconomy, or how to choose become a key under this situation.This paper based on the existing related literature review, to seek a reliable andeffective theory, and on this basis, the research content of this paper raises: throughmonetary amount equation, in particular is a deformation quantity equation-Taylor rule,to study relationship of real economy, inflation, and interest rate. And through empiricalstudy, we found that the output gap and inflation gap, the nominal interest rate and realinterest rates have a long-term stable cointegration equation: real interest rates has existedpositive correlation with all other variables, which means that the Taylor rule is applicablein China, and China’s economic reality conform to the traditional theory. Further studyfound that Taylor rule not only have a cointegration relationship, but also have a thresholdeffect:in short term, the threshold effect in cointegration equation will quickly transmit thepositive impact into the other variable so that the Taylor Rule will soon come back tosteady. But when the negative shock comes, it will slow down the progress. Consideringthe current policy Chinese government and the central bank’s taking, it is expected that theinflation will decrease in the future. According to the analysis of Taylor rule equation, thispaper also gives a suggestion of how to deal with different situation of inflation. In longrun, the central bank should focus on the target rate of inflation. In short term, the centralbank should moderately reduce regulation in the inflation period to avoid excessiveaccommodation. While in the austerity period, it should appropriate increase regulation,because the adjustment effect is inferior to the former situation.