Measurement And Evaluation Of China's Core Inflation Rate Based On UCSVO Model

The effect of monetary policy on economic activity has lagged effect.And misjudging the temporary fluctuation of prices as the trend growth of the overall price level will have immeasurable consequences.If the price level is only a temporary low and the central bank yet consider it to be a deflationary trend and adopt a long-term slack policy to ease the pressure of deflation,which may amplify the economic fluctuations and cause serious economic distortions.So,how can central bank accurately reflect the fluctuations in price levels,and what should the government do when facing the temporary price fluctuations? The above questions can be answered by building core inflation indicators that are applicable to our country.The concept of core inflation was first proposed by Robert.He believes that excluding the temporary sector price shocks in the headline inflation may reflect the trend of price changes more accurately.Subsequently,the U.S.Bureau of Labor Statistics(BLS)takes the consumer price index excluding food and energy as the core inflation indicator,published monthly.China's National Bureau of Statistics(NBS)started publishing the monthly consumer price index excluding food and energy sources in 2013 but due to the complicated causes of inflation in our country,it is not appropriate to directly use it as a core inflation indicator.On the one hand,this practice itself is not reasonable.First,this indicator cannot be more comprehensively excluded from the impact of the price shock.It is just too subjective to exclude food and energy sectors which are vulnerable to be shocked.There is no definitive theoretical evidence to prove the scientificity of this approach.Second,the impact of different sectors to the price shock will change over time,and excluding the food and energy sector may lack of certain stability and sustainability;Finally,the food and energy prices also contain information on inflation trends,the direct elimination will result in the corresponding information Loss,which in turn causes considerable deviation in the identification and estimation of core inflation.On the other hand,our unique environment makes this indicator not applicable in our country.Compared with the developed countries,the Engel's coefficient of our country is still at a high level,and food expenditures still occupy a large proportion.After removing the two sectors,the core inflation index only accounts for about 30% of the total price level.This index obviously does not have the ability to represent the overall price level trend.At the same time,the effect of the transfer effect of food price changes on the potential inflation cannot be ignored,which is difficult to ensure the accuracy of the direct elimination.Therefore,it is particularly important to set up the core inflation index applicable to our country.The key to measuring core inflation is to eliminate the noise in the inflation series,which can change over time,making the measurement of core inflation somewhat complex.Therefore,we use the inflation rate of GDP deflator as the proxy variable of the headline inflation.By using the Gaussian Mixture Approximate Chi-Square(FCM)method,the core inflation rate of China can be estimated by constructing a Unobserved Components Stochastic Volatility Outlier Adjusted Model.In the measurement of the core inflation rate,the abnormal fluctuation of the price level was captured,and the data of these abnormalities were adjusted.Subsequently,the paper evaluates this index from three aspects: basic statistical analysis,following trend inflation and causality test.The results show that the core inflation index based on UCSVO model can well reflect the potential trend of inflation.Identification of abnormal signals can also provide a reference for policymakers and contribute to the long-term and stable economic development.