| Macroeconomic policy has four major goals:economic growth, price stability, full employment and the international balance of payments. As the main targets in the four macroeconomic policy goals, inflation and economic growth are advantageous to achieve the macroeconomic policy goals if we pay attention to them. Two problems in the theoretical circle, one is the relationship between inflation and economic growth and another is the optimal inflation, all of them have not been able to achieve the same opinions. The relationship between inflation and economic growth exists a variety of opinions about inflation has a promoting effect or harmful effect on economic growth now, which are different to the original idea of inflation has no effect on economic growth. There are two views on the optimal rate of inflation, Friedman said the optimal case only appear on the time when nominal interest rate is zero which means deflation, Phelps has a different point about the optimal rate of inflation, who points out that the nominal interest rate should not be zero, and the optimal state appear on the time when nominal interest rate greater than zero. The analysis of the different perspective will get different results, and then gives the different optimal rate of inflations. Although there are many different points in theoretical circle, but for now, most people agree with the viewpoint that when the inflation is moderate, it is good for the economy at this time. But when the inflation is higher (hyperinflation), it has adverse effects on the economy. This shows that the influence of inflation on economic growth does not necessarily have been positive or negative, or have the same marginal effects. The fact is that the effect about inflation on economic growth should be with nonlinear properties. That is to say, there is a certain interval, which make inflation in this range has a promoting effect on economic growth, and outside the range, the inflation has a negative effect or no effect on economic growth or the promoting effect was reduced compared with inflation in the certain interval. Namely, there exists a threshold effect. By contrast, low levels of inflation may be more advantageous to economic. Based on the above, in this paper, it discusses the optimal rate of inflation in China on the premise of economic growth. By giving the best inflation rate on economic growth, and then gives the range which distinguishes whether it should adjust and control or just doing nothing. When inflation is in the interval of the most advantageous on economic growth, the authorities of policy implementation do not have to adjust it at this time. Outside the range, the policy authorities can adjust it, and make it back to the most conducive interval.At first, this article analyzes the morphological characteristics of China’s inflation rate in the current, since July 2011, the year-on-year growth rate of CPI began to gradually decline, now our country’s year-on-year growth rate of CPI mainly keep within the range between 1% and 2%. Based on the analysis, it has found that there are three reasons caused the current continuous low inflation, which impacted by its persistence coefficient of 0.8, as well as the rapid decline in international crude oil prices, and it also affected by the rapid drop in the money supply and a slowdown in economic growth.Next, the article summarizes the discussion of the relation between inflation and economic growth in several theories including the Keynesian theory, monetary theory, Tobin effect, endogenous growth theory and the rational expectations theory. Then analyze interaction between inflation and economic growth, the conclusion is that inflation through the allocation of resources, investment decisions, foreign trade and consumption to affect the economic growth.Then, the article analyzes the relationship between inflation rate and economic growth through the sample data. Our country has experienced low inflation and high economy growth stage, high inflation and high economy growth stage in various historical stages, which showing that the relationship between inflation and economic growth may not be a simple linear relation, namely there needs to consider a nonlinear model to describe the relations between inflation and economic growth, and thus get the optimal rate of inflation to promote the economy.Considering that the nonlinear function possibly exists between inflation and economic growth, this article uses the threshold regression model to analyze the relationship between inflation and economic growth. The theoretical meaning of threshold regression model is that the influence of independent variable on the dependent variable is not consistent when threshold variables at different intervals. In the threshold regression model, economic growth is the dependent variable, using inflation as the threshold variable, some other control variables which have an impact on economic growth except inflation was also introduced at the same time. The choose of control variables are according to the new classical theory and so on, the article chooses the initial GDP level, birth rate, the growth rate of labor, investment, the ratio of government spending to GDP and foreign trade as control variables. In order to guarantee the correctness of the threshold regression model, this article use ADF test and cointegration test to determine that whether there is a long-term and stable relations between the control variables and economic growth. Base on this to adjust and selection variables.In this paper, it can be conclude that a triple threshold regression model can well explain the nonlinear relationship of inflation on economic growth. There is a significant nonlinear effect between inflation and economic growth. And the rate of inflation is divided into four intervals:(-∞,2.93%), (2.93%,3.77%), (3.77%,6.63%) and (6.33%,+∞), when the level of inflation in the range (2.93%,3.77%), it’s the optimal range to promote economic growth. When the inflation rate exceeds 3.77% or lower than2.93%, in order to promote economic growth, policy can be used to make it back to the optimal range. |
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