Research On The Relationship Between Chinese-style Fiscal Decentralization And Inflation Which Based On Provincial Panel Data

Inflation not only affects economic growth, but also has an important impact on social stability, that’s why it has been an important topic of macroeconomic research.Since the 16th century,the reasons of the inflation has being studied for several hundred years, up to now numerous branches have appeared.Different school have different focus,but they all base on investment and money supply,the two direct factors that cause inflation, and rarely concern about the deeper institutional factors behind the investment and money supply.Fiscal decentralization is one of the most important reforms since reform and open and the relationship between fiscal decentralization and inflation has been widely discussed and studied recently.Based on the characteristics of fiscal decentralization, this paper mainly analyzes the transmission mechanism of fiscal decentralization to inflation in our country,then build an empirical model to give validation. Firstly,The article introduced the political tournament game model to analyse how the fiscal decentralization impacts the behavior of local government, the result shows in order to improve the ranking in the race to get promotion opportunities, local government will increase investment and enhance the efforts with the improvement of fiscal decentralization.secendly,We will use a simple model to study the transmission mechanism of the efforts of local government to inflation,and we find that besides inflation inertia, the local government effort is also a main reason of inflation.Finally,we will build econometric models to validate our previoustheory.A simple panel regression on 1996-2012 provincial panel data in our country will be firstly used,and the results show there is a significant positive relationship between fiscal investment and decentralization, and there is also a stable positive relationship between inflation and investment.Considering endogenous, heteroscedasticity and serial correlation,We will use the system GMM to estimate our model, we find there isn’t much differnence comparing with random effects model.but we can see that efforts of local government also have a certain inertia and the efforts of local government have a stronger influence on inflation.Then we will establish a panel VAR model is further analysis, pulse diagram and variance decomposition will be used to observe effects of shock in different periods and we will find a positive relationship between fiscal decentralization and inflation occurs only in the short term, in the longer term, the improvement offiscal decentralization will reduce inflation.