The Change Of Causes,the Lewis Turning Point And Inflation

Since the21st century, China has experienced inflation for three times, causingthe widespread concern of all sectors of society. Scholars also did a lot of researchon inflation, result in an increasingly diverse understanding. Based on the traditionalmonetarist and Phillips curve, a lot of analysis on causes of inflation is derived, suchas international price input, inflation expectations and increasing labor costs. Theconcerned research is focus on definition and change of the causes of inflation. Since2000, the largest change in China’s economy is the degree of openness has beenincreased dramatically, which not only brought a sustained and rapid economicgrowth, but also brings the input-inflation, accelerated the emergence of urban-ruraltransformation and the Lewis turning point. It is just the Lewis turning point, whichmakes the Balassa-Samuelson effect begin to be effective in China. In the contextof the nominal exchange rate not fully floating, the real exchange rate appreciationpressures translate into inflationary pressures, at the same time, the structuralcharacteristics of and inflation aggravates. The increase of agricultural-goods pricessurpasses the service and industrial-goods prices significantly, which is the mainforce to improve inflation level. This thesis is to study the causes of inflation and itschanges in the last decade, to make a systematic and comprehensive study on thebasis of sorting out the development path of past inflation and inflation theory, and inview of upgraded China’s economic openness, the emergence of Lewis turning pointand the promotion of inflation.In order to highlight the causes of inflation changes and the previous studies, thispaper firstly summarizes researches on the causes of past inflation comprehensively,and combines the conclusions, research methods theoretical models and empiricaldata detailedly and carefully.Secondly, this paper will be a comprehensive test of the causes of a variety ofinflation in the same model to identify variables with significant explanatory power.This article first systematically calculated the monetary-cause variables, after the recalculation of broad money supply, calculated liquidity-excess factor through theanalysis of the liquidity needs. And then the author selected total demand, inputinflation, labor costs and inflation expectations variables and place them in theextended Phillips curve model to make a regression analysis by the distributed lagmodel. After that, the author use the SVAR model to analyze the mutual dynamicrelationship between variables to verify the regression results of Phillips model, andto reveal the extent of the impact of the various causes of inflation with the structuralimpulse response and variance decomposition analysis method. Combining twokinds of empirical test results, with the degree of improvement of China’s opening tothe outside world since2000, the causes of inflation changed. The impact fromover-heated economy and over-issued currency is decreasing, instead, the input priceof the international industrial goods and the rise of migrant workers’ wages become asignificant impact on the causes of inflation and explain the higher proportion ofinflation changes.Again, the paper did a deeply research on how the rising wages for migrantworkers push up inflation. By observing the historical experience of East Asiancountries, the authors suggest that the upgrading of opening up will bring theacceleration of urban and rural transfer and lead to the emergence of Lewis turningpoint, which makes Balassa-Samuelson utility effect gradually. This is the theoreticalbasis and conduction channels for wages of migrant workers to push up inflation.The author modified and extended the five criteria proposed by Minami, a Japanesescholar, and proposed the five criteria to determine when the Chinese economy comeacross the first inflection point of Lewis. Based on the empirical results, this thesisconcluded that Chinese economy have come cross the fist Lewis turning point inaround2004, but there is no sufficient evidence that the Chinese economy is close toor reach the second turning point of the Lewis.Finally, this paper regarded the Balassa-Samuelson effect as a theoretical basis,introduced the dual economy theory into Rogoff model, considered the agriculturalsector separately, deleted the assumption of equal wages in various departments, andthen calculated the surplus labor phase and labor shortages phase of theBalassa-Samuelson model with the first turning point of the Lewis as a boundary for the first time. The author ignored the foreign sector in the context that the nominalexchange rate is not fully floatable, that is the real exchange rate appreciationpressures mainly reflected as the domestic inflationary pressures. After that, thetwo-stage model was verified separately, the results show that the labor surplusphase during the1991-2003, the Balassa-Samuelson effect in our country was notfully reflected. The increased labor productivity of industrial sector, relative to theagricultural sector, promoted the inflation to a certain extent, but this is not truewhen considered the increased labor productivity of tradable industrial sector,relative to the non-tradable service sector. During the labor shortage stage, from2005to2010, Balassa-Samuelson effect began to play a role. It is the increase ofproductivity of the agricultural sector and the industrial sector relative to theagricultural sector that have a significant role in promoting inflation. In the end, theauthor briefly discusses the conduction mechanism of the phenomena above, namelythe most important feature is that the wage-level of the agricultural sector begins tobe decided by the agricultural labor productivity, after the country go through thefirst Lewis turning point, which is consistent with the industrial sector wagedetermination mechanism. This transition leads the wages between different sectorsto converge and the price of agricultural sector (non-tradable sector) with lowerlabor productivity to rise, relative to the price of industrial sectors (tradable sector)with higher labor productivity, which ultimately pushes the overall inflation level.