An Estimation On Dynamic Factor Model Of China’s General Price Index

Generally speaking, how to maintain the stability of the general price level is one of the main objectives of monetary policy.However, in China, traditional price indices like the CPI, PPI, GDP deflator index, which are only include the price of entities like goods and services in the real economy as headline price indices, often been used to measure the general price level. In addition, the headline price indices are just a description of past price level, they can’t contain the information about the social price movement in the future.Since the twentieth century, macroeconomic regulation and control policy can no longer ensure general price and financial markets at the synchronous stable. Ignoring asset price volatility probably makes the monetary Policy be of no effect. The traditional sense, as long as price stability can automatically achieve financial stability mechanism is gradually being broken.More and more scholars think, monetary authorities, whose main objective is maintaining price stability, shouldn’t use traditional price indices, which only include the current goods and services, to make macro-control policies.They should build a more reasonable and accurate index, which include asset prices, to reflect the price changes.Firstly, in accordance with the basis of the classified assets, we use state space model to analyze the common factors and individual factors of different types of asset price volatility.Secondly, we use dynamic factor model to construct different types of general price, which include corresponding asset prices Such as general price with house prices(HGPI),general price with stock prices(SGPI), general price with bond prices(BGPI), general price with property prices(PGPI), general price with energy asset prices(EGPI). Finally, given all of the selected asset price, we build a comprehensive general price index(GPI), which can be used to measure the fluctuation of general prices.Given the subjective factors and limitation on research level in empirical analysis, the the general price indices proposed in this paper can not replace the original measure Indices so far,but it still can be used as a reference for consumption and making macro-control policies.