Interaction Relationship Between Stock Prices And Inflation Expectation

After 2000, China has entered a new growth cycle. Our economy experiences serious inflation for at least three times, which has serious impact. According to theoretical studies and practical experience on controlling of the inflation, this article focuses on managing the inflation expectation. Although the academic studies of the theory of the inflation expectation have been mature, but what the factors really impact the inflation expectation as well as the specific impacting mechanism has been still deficient. On the other hand, the stock market has occupied an important status in our national economy, so this article will mainly focus on the impact of stock price volatility affecting the inflation expectation. Besides, we are interested in whether there is a mutually reinforcing and continuous spiral process, this article will simultaneously concerns about the impact of changes in inflation expectation affecting the stock price volatility.To study the interaction relationship between stock prices and inflation expectation, this article first analyzes the mechanism of interaction between stock prices and inflation expectation. Then basing on the expected future price level got from "household savings survey system" of the People’s Bank of China, the article takes the time-varying parameter method estimate the inflation expectation of the public. Subsequently, the article uses the Markov Regime Switching vector autoregressive model to empirically analysis the relationship of stock prices and inflation expectation from the fourth quarter of 2000 to the first quarter of 2013. Finally, According to mechanism analysis and empirical results, the article obtain the following conclusions:Firstly, the public’s inflation expectation has good self-fulfilling characteristics. Although stock prices have pushed up the public inflation expectation, the inflation expectation has expected to drop according to the rise of the stock prices. The mutually reinforcing and continuous spiral process does not exist between the stock price and inflation expectation. Secondly, Stock price actually promotes the growth of the consumption and investment as well as the total social aggregate demand through the wealth effect, Tobin’s q effect and balance sheet effects, but the increase of total social aggregate demand does not push up the public’s inflation expectation. The reason stock price pushing up the inflation expectation is that stock price implicates the information about the present and future economic situation, inflation and the expectation about the monetary policies. During the period of the greater of the volatility of the stock price and the macroeconomic, the greater of the positive effect of the stock price on the inflation expectation. Finally, inflation expectation is expected to cause the stock price to fall. The reason is that inflation expectation affects the consumption and investment behavior of the economic entities, which affects the macroeconomic stability. But during the different periods of macroeconomic and stock market volatility, there are different manifestations.Inflation expectation expects to negatively affect the stock price greatest, during the stable period of the stock price and the macroeconomic.