Cyclical Fluctuations And Formation Mechanism Of China’s Inflation Rate

As a crucial economic indicator that reflects a national price level, the inflation ratehas attracted a wide attention from Chinese government, academia and citizens since thereform and opening which began in1979. With the financial crisis and recession in recentyears, the inflation rate in China has also been coming across a drastic fluctuation. Basedon the perspective of economic cycle, this paper analyzes the characteristics and regularityof cyclical fluctuations of inflation rate by studying the theory of economic cycle andinflation at home and abroad. Then, establish the Markov switching model withtime-varying probability and apply the nonlinear measurement method to empirically studythe formation mechanism and influence factors of cyclical fluctuations of inflation rate,based on the dynamic mechanism theory of inflation.In this context, the year-on-year growth rate of CPI is taken as a proxy variable ofC’ y monthly data from2000to2013based on MSCinformation criterion. The result shows that the MS-TVTP model with two-state andthree-y C’ I1equilibrium coefficient is more than1, C’under the influence of comprehensive economic factors until it reaches the peak. On the21C’inflation rate is in the downtrend under the influence of comprehensive economic factors,until it reached the valley.In the process of exploring the cyclical fluctuations and formation mechanism ofChina’s inflation rate, empirical results show that the model with the leading index as thetransition probability parameter can depict the characteristics of China’s inflation rate cycleeffectively. In addition, this paper studies the influence of monetary policy, cost, demand,input and expected factors on cyclical fluctuations of China’s inflation rate from theperspective of driving factors of inflation, respectively. The results show that the moneysupply (M1), industrial value added and RMB real effective exchange rate became the maindriving factors for China’s inflation rate cycle in different periods, and the regulating effectof money supply and exchange rate on China’s inflation rate is very limited. On the contrary,interest rate has the ability to adjust the inflation rate in China. However, due to the opening of the capital market in China, as a monetary policy, the independence of interest rate hasbeen weakened.