Research On Dynamic Mechanism Of Inflation Based On Expectations, Persistence And Volatility

Inflation as a complex and pervasive economic phenomenon has been widelyconcerned by central governments and central banks, and relevant theoretical andempirical research of inflation has become a hot issue in macroeconomic field.Because inflation has the direct influence on development of country economy andwelfare level of country residents. Therefore, central banks consider inflation as mainpurpose of financial macro-control. With the operation of monetary policy becomingmatural and transmission mechanism of monetary policy becoming perfect in China,monetary policy has gradually become the central bank's main means of anti-inflation.Understanding and grasping deeply the dynamic characteristics of the inflation inChina has a vital role for the central bank to make effective anti-inflation policy.Therefore, learning from scholars'research fruits on inflation, based on theestablishment of quantitative economics model, we conduct a comprehensive and deepresearch on the dynamic mechanism of China's inflation based on expectations,persistence and volatility. The article contains six chapters, the basic structure andmain contents are as follows:In Chapter one, we firstly introduce the research background and topicsignificance, and then summarize the domestic and foreign literatures of inflationpersistence, inflation expectations and inflation uncertainty. Finally the structuralarrangements and major innovations are given.In Chapter two, we introduce some basic theories of inflation and review theinflation history in China since reform and opening-up. The basic theories of inflationinclude: definition, classification and measurement methods of inflation, causes andtreatment methods of inflation. Then based on these theories, we use the consumerprice index to measure inflation since reform and opening-up, and analyze the maincauses of each stage of China's inflation, and then narrate central government'sgovernance methods and their effects. In Chapter three, the basic characteristics of China's inflation persistence arestudied based on DSGE model. We firstly introduce the definition and measurementmehods of inflation persistence. Then, based on the analytical framework of DynamicStochastic General Equilibrium model, we construct the dual-price sticky NewKeynesian Phillips curve model, the Bayesian estimation results of the DSGE modelshow that prices are sticky due to infrequency and convex costs of price adjustments inChina, the Phillips curve model built based on two kinds of price stickiness generatesendogenously inflation persistence and reveal the micro-foundation of its existencewell. Finally, the relationships between inflation persistence and inflation are examined,finding that inflation persistence is an important reason of creating inflation,and withthe level of inflation increasing, the impact of inflation persistence on inflation willincrease too.In Chapter four, the basic characteristics of China's inflation expectations arestudied. Firstly, the concept, measurement methods and formation types of inflationexpectations are introduced. Then, the general linear regression model and varyingcoefficient model are used to portray the unbiasedness and effectiveness hypothesis oftesting limited rational expectations, the empirical results based on ordinary leastsquares estimation and Kalman filtering estimation show that a limited rationalinflation expectations type of our economists has been formed gradually. Finally, therelationships between inflation expectations and inflation are examined, and the resultshows that the correlation coefficient is as high as 0.97 to 0.98, as the same time,Granger causality test results show that there is mutual positive feedback effectbetween inflation expectations and actual inflation rate.In Chapter five, we mainly study the dynamic characteristics of China's inflationuncertainty. Firstly, the concept and measurements of inflation uncertainty areintroduced. And then, ARFIMA-FIEGARCH model is used to find that inflationuncertainty has the characteristics of long-memory and leverage effect. Further, therelationship between inflation and its uncertainty is tested using Granger causality testmethod, the result shows that higher inflation level leads to the higher inflationuncertainty. Finally, based on the LSTAR model, the nonlinear relationship betweeninflation rate and inflation uncertainty is tested to find that inflation rate has the threshold effect on inflation uncertainty. When the inflation rate is less than thethreshold value, the cumulative influence coefficients of inflation rate on inflationuncertainty are small. Otherwise, when inflation rate exceeds the threshold value, theimpact becomes larger.In Chapter six, the relationships between inflation, real output and monetarypolicy are studied. Fristly, using VAR-GARCH model, we examine the relationshipbetween inflation and real output based on the uncertainty perspective, finding that realoutput growth and its uncertainty are unidirectional Granger causes of inflation.Therefore, keeping economic growth stable is beneficial for keeping the price stable inthe economic macro-control. And then we study the lag impact of inflation persistenceon monetary policy, finding that the change of systematic monetary policy and thenon-systematic monetary policy needs to go through three quarters and six quartersrespectively to have the biggest impact on inflation. And then analyze the optimalmonetary policy strategy of the central bank, when it can't accurately measure inflationpersistence, finding that monetary policy strategies underestimating the inflationpersistence are beneficial to economic development. The above findings provideempirical evidence to determine the timing and strength of monetary policyimplementation of central bank. Finally, the roles of inflation targeting to anchorinflation expectations and to reduce inflation uncertainty are analyzed, finding thatflexible inflation targeting in China would be an effective monetary policy analysisframework considering China's current economic development situation, and thisconclusion provides a reference for China's future monetary policy.