Study On The Threshold Effect And The Main Influencing Factors Of Inflation In China

The thesis mainly researches the threshold effect of inflation on macro-economy and the main influencing factors of inflation in China. Among the threshold effect, there are three aspects including threshold effect of inflation on economic growth, threshold effect of inflation on financial development and threshold effect of inflation on the relationship between financial development and economic growth. Threshold effect of inflation on macro-economy means when inflation exceeds threshold level, it will obviously exert negative impact on it. Combining it with Chinese price trend, identifing the main factors of influencing threshold level of inflation is very important for efficiently managing inflation. Researching the problems above has very important application value for central bank working out and implementing well targeted monetary policy.It mainly includes the following distinctive research work and conclusions.Firstly, regarding threshold level of inflation above which inflation will exert negative impact on economic growth as research subject, it estimates the threshold level of inflation in China from 1978 to 2009 using the threshold regression model. The result suggests that the optimal threshold level of inflation on economic growth in China is 5 percent. When inflation exceeds 5 percent, it will obviously exert negative impact on economic growth. The result not only supplies a specific digital target that keeping inflation below 5 percent for China's central bank to implement monetary policy, but also helps to expand the discussion of implementation of inflation targeting in China, improves the operation of inflation target quantization and forcast, and provides important support for implementation of inflation targeting in China.Secondly, by building an threshold regression model, it estimates the threshold level of inflation on financial development in China from 1978 to 2010. Empirical evidence shows that the optimal threshold level of inflation on financial development is 3 percent or 5 percent depending on different financial development indices. When inflation exceeds 5 percent, financial development will be all-around depressed. This conclusion not only highlights Chinese monetary policy target which is keeping inflation below 5 percent, but also verifies financial development is an very important channel through which inflation affects growth in a nonlinear fashion.Thirdly, with threshold of inflation on financial development and threshold of inflation on economic growth as standards, it divides the sample from the first quarter of 1996 to the first quarter of 2011 into high inflation and low inflation and investigates whether the relationship between financial development and economic growth varies according to inflation. Empirical evidence shows that on condition of low inflation, financial development exerts a significant positive effect on economic growth, while on conditon of high inflation, the growth effect of financial development appears to be insignificant. The conclusion can urge government department consider the level of inflation when they investigate relevant financial development policy. The nonlinear relationship between financial development and economic growth under different inflation circumstances verifies the importance of price stabilization once more.Finally, by developing an inflation dynamic model containing excess liquidity, excess-demand, cost-push and foreign inflation delivery, we verdict the factor's relative importance on inflation. And on the basis of empirical results we articulate the logical causality of the inflation formation mechanism in real economy. Empirical evidence shows that among the four factors of inflation, excess liquidity has the most important effect, followed by excess-demand, and the cost-push, and the foreign inflation delivery has the least effect. Trace to its source, the main reason for excess liquidity are central bank's passive money supply in order to hedge great foreign exchange under the existing exchange rate system and credit expansion. Excess demand comes from the following two aspects, on one hand, net exports expanding formulats a huge foreign reserve and stays pure purchasing power in demostic, on the other hand, the relatively loose macroeconomic environment to promote demand expansion. In a word, Excess liquidity and excess demand act or react on each other, excess demand is on condition of excess money supply in the market and loose macroscopic policy environment. They interact and push up prices.