Research On Nonlinear Effects Of Inflation On Private Investment

Moderate inflation can benefit all sectors of the economy, and stimulate private investment. However, high inflation can destroy the normal operation of the market price mechanism, and make economic agents face more uncertainty and higher financing costs, which is bad for investment decision-making. Private investment is playing a more and more important role in economic growth. It's of great significance to study the impact of inflation on private investment in different inflation intervals,for we can adopt more sound macroeconomic policies and promote the development of private investment. Based on a nonlinear principle, this paper tries to study the effects of inflation on private investment.Through theoretical analysis, we conclude that inflation can affect the environment and financial source of private investment and the effects may be nonlinear. On the basis, we undertake a qualitative analysis of the relationship between inflation and private investment in China, and obtain the preliminary evidences of the possible nonlinear effects of inflation on private investment.Furthermore, we collect related data of China's 30 provinces(autonomous regions and municipalities) from 2000 to 2013, and analyze the effects of inflation on private investment in China by using the nonlinear panel smooth transition regression(PSTR) model. The results show that inflation has nonlinear effects on private investment. It displays as: when the inflation rate is below 3.36%, inflation uncertainty has a positive effect on private investment. While it is above 5.88%,private investment will be negatively impacted by inflation uncertainty.The above two regimes transition occurs when the inflation rate is between 3.36% and 5.88%.Moreover, the relationships between bank credit and private investment, public investment and private investment are nonlinear in different inflation intervals. The change derection of the effect of bank credit on private investment is the same as that of inflation uncertainty, while the impact of public investment on private investment is opposite to that of inflation uncertainty.According to the results of theoretical and empirical analysis, we propose that the central bank should keep the inflation rate below 3.36%, the government should optimize the structure and scale of public investment, financial institutions should increase financial support for private investment, and the private investment layoutshould be optimized.