The Causes Of Inflation In China Based On FAVAR Model

Inflation is one of the most important topic of China’s macroeconomic management. The research on inflation has always been the hot spot in academic circles, which has repeatedly discussed. Throughout the research achievement of inflation at home and abroad, they mostly selected several factors to study the cause of inflation, such as monetary factors, demand factors, cost factors, structural factors and so on. But they usually choose the different economic indicators based on the needs of their studies, which means that there is no uniform indicator division standard, and would make the conclusion different. On the other hand, the causes of inflation in China is very complicated, not a single one can affect it. In recent years, the real estate market, capital market and foreign trade activities in our country are very active, and their impact on inflation has gradually attracted great attention of scholars. So this paper will select currency, economic, real estate market, capital market, and international demand as the factors to deeply investigate the dynamic regulation of inflation ans its causes, which is more conform to our financial situation, more significance, and more targeted to propose some relative strategic suggestion for our macroeconomic management.As we review the literature, we can easily find that most scholars choose VAR model or SVAR model as their empirical research method. Based on analyzing the reasonable and practicable of FAVAR model, and summarizing the limitations of VAR and SVAR model, this paper decide to choose FAVAR(Factor-augmented Vector Autoregressive) model as the research method. FAVAR model can make full use of our macroeconomic indicators, and put them into the analytical framework to extract the multi-stress reflecting inflation volatility nature, so that to analysis the effects of inflation in a full view.Due to the availability of data,we finally use 44 economic indicators and 168 dates between January 2000 and December 2014, to research the cause of inflation. And finally we get the following results:firstly, in the Factor Analysis, the monetary indicators did not form a unified impact strength, but distributed to each factor group. This means that our economy has developed to the phases from coarse to fine, and the role of monetary policy is more detailed. Therefore, macroeconomic management should take different monetary tightening policy with different areas. Secondly, during 2000 to 2014, the real estate market, international demand, credit scale, economic level and capital market are all the causes of inflation in our country. Except the economic level can restrain inflation, others have a positive effect on inflation. Thirdly, the real estate factor, international demand factor, credit scale factor, economic level factor and capital market factor have a long-term equilibrium relationship and a short-term dynamic relationship with inflation factor. From the analysis above, we can reveal the reasons of inflation, and find out their influence way and pattern, so that we can design the macroeconomic management policies definitely, to solve the harmful effect from inflation to economic growth. At the end, we put forward the relevant macroscopic management suggestion.