The Research On Relative Price Adjustment Problem In The Overall Price Index Changes In China

Price stability is one of main goal of the national macroeconomic regulation andcontrol,government department takes the general level of prices steady keeping as thefirst priority of macro-control for the past few years.Obviously,the purpose ofpromoting price stability is improving the resource allocation optimization’s basic roleof market mechanism, and then reduce the adverse effect of inflation on economicgrowth.The change of general level of commodity prices can measure the level ofinflation, it reflects the absolute prices changes which is a macro economic concept.While relative price adjustment can measure the stability of the price level,it reflects therelative price changes, which is a micro economic concept. Then, what is the connectionbetween the change of general level of commodity prices and relative price adjustment?It has important enlightenment for us to understand microeconomic foundation of themacroeconomic phenomenon.In order to study the above problems,the article will useRelative Price Variabiliaty(RPV) to measure the degree of Relative Price adjustmentrefer to research abroad, and use the fluctuations of overall price index to measure thechange of general level of commodity prices.so this paper will discusses the aboveproblem through the expression of relative price adjustment problem in the overall priceindex fluctuation, in order to provide reference for government department to makeappropriate price stabilizing policy.The research content of this paper is as follows.In this paper, we briefly review the inflation theory and relative price theoryfirstly,then we summarizes the theory of relative price adjustment mechanism in overallprice index fluctuation.According to the economic theory,the menu cost model showsthat the impact of expected inflation on relative price adjustment is positivesignificantly,the signal extraction model and extended signal extraction model show thatthe impacts of unexpected inflation and inflation uncertainty on relative priceadjustment are all positively related.Other theories explain the relationship betweeninflation and RPV are focus on the exogenous variable,considering the marketbehavior,some theories take inflation and RPV as it respectively,the former show thatthe increased RPV is related with inflation itself but unexpected inflation or inflationrate changes,the latter supposed that the reaction of price on disturbance is asymmetry,so the larger the RPV,the greater the inflation rate.While,some other theories takemacroeconomic policy as exogenous variable, which show that the relationship between inflation and RPV is mainly because of money stock change,which lead to the change ofexpected price level, and then increase RPV, and show that PRV is related with thepositive and negative change of unexpected iflation, the reaction of RPV on inflation isasymmetry.Secondly,we do the analyses of overall price index fluctuation and relative priceadjustment ’s influence factors in China.The results show that the relative priceadjustmnet’s influence factors in all kinds of the overall price index changes are mainlythe indexes of price change larger and smaller, and it is also found that the inflation rateis not vary high in the relatively violent period of relative price adjustment, whichillustrate that the rising of overall price index in our country is structural butcomprehansive at that time. Although the overall inflation rate is not high, the severerise or severe decline, slow up ot slow drop of classification commodity prices are stillnot conducive to the stability of overall price level. In order to prevent thetransformation from structural rising to comprehansive rising, it is necessary forpromote the rlative stability of overall price level to adjust the commodity price ofstructural rise faster.Thirdly,we do the empirical analyses to test the relationship between inflation andrelative RPV from dynamic effect angle,theoretical model angle,asymmetric effectangle and threshold effect angle through all kinds of econometric method and monthlydata in2001-2010and provincial panel data in1994-2010based on the summary of theeconomic theory hypothesis.The results of the study are as follows.First ofall,considering the influenceof lagged dependent variable and using the dynamic paneldata model, the research show that the impact of inflation on relative price issignificantly positive in China, it is illustrated that the overall price index fluctuation hasobvious structural characteristics in China.The robustness test shows that our model ismore effective than the traditional estimation method. Then,we test the relationshipbetween inflation and relative price from theoretical model angle and consideringstructural breakpoints in China,whether we can explain the relationship by foreignexisting economic theories.The research show that the menu cost theory, signalextraction model and extended signal extraction model,consumers search cost theoryare all surported by our data.The relationship may change in different economicsituation,the positive impact of unexpected inflaion on RPV is only at the high inflationcircumstance.So, their relationship can’t be explained by only on theory,and combinedwith three theory is also not perfect.Third,we deduced the theoretical model to test the asymmetry affect of inflation on relative price according to supply and demand model,the research show that this asymmetry exists indeed, which means that the impact ofinflation on relative price is bigger in price level rising period than price level decliningperiod obiously.This shows that the price change is downward rigidity in China, itmeans that absolute price always tends to upward adjustment, which resulting theresponse of relative price adjustment on inflation inpact is asymmetry. At last, accordingto the empirical test result of panel threshold model, we can conclude that the thresholdeffect is really existed, that is the expected inflation is benefit for price stability in thelow inflation interval, while in the high inflation interval is not.According to foreignresearch,in order to promote the price stability,the inflation rate should be lower than thethreshold level of5.6%in China,the inflation rate is too low or too high weredetrimental to the price stability.Lastly,according to the empirical test results,we put forward some macroscopicpolicy suggestions to promote price stability under the experience to fight inflation indomestic and foreign and the stable policy of general price level,Such as to keep theeconomy moderate steady growth and effective control of the money supply,manageinflation expectations and considering the asymmetry and threshold effect to make rightfiscal and monetary policy, to analysis and judge the causes of inflation to make rightpolicy, avoid to introduce tighten policy blindly to destroy the basic role of price systemto resources’ optimal allocation, which is disadvantageous to the sustainabledevelopment of economy, and we should continue to implement the policy of promotingprice stability,called article16,which our country has issued.