Research On The Inflation In China From A Fiscal View

From a thorough investigation of inflation fluctuations and macroeconomic policies in China since1990s last century, the author find an interesting phenomenon deserved to be researched more deeply. The point is that fiscal policy is operated tightly when the inflation is rising and to the opposite as is deflation period. This paper is studying the relation between fiscal policy and inflation in China based on that phenomenon. And the main question has two division levels in this paper. One is to answer whether there is a definite relation between the inflation and fiscal policy especially the government investment. The analysis on this level is trying to find a new dimension of research on inflation in China. Another is to figure out the mechanism through which the fiscal policy can affect the inflation. The research of this level concerns the current fiscal policy instruments and the internal characteristics of the economy through which the policy works.This paper constructs a medium-scale structural model of Chinese economy and uses the dynamic stochastic general equilibrium model to research the Chinese inflation issue from the fiscal perspective. The current standard DSGE model is constructed dependent on the developed economies so it is full of developed economy’s characteristics. Once the conflicts between the theoretical model and Chinese economic realities appear from the research, it is a good way to figure out the differences between Chinese economy and the developed ones. Therefore, the use of DSGE model is another way to realize the problems in Chinese economy and researches can be continued to improve the current framework and to serve the Chinese economy better.After review the literatures on relation between fiscal policy and inflation, the author analyze the fiscal policy operations and inflation fluctuations in China in retrospect to1994. Chapter3reveals the relationship between the policy and inflation with an empirical analysis. And chapter4constructs a DSGE model with the Chinese economy characters to analysis the impact of fiscal policy on inflation in China. Chapter5calibrates the parameters governing the steady state based on quarterly data. The conclusions from the quantitative analysis are as following. Firstly, either the length or the running track of the inflation is highly accordantly to the economic fluctuation. Inflation is a cyclical and lagging indicator of economy. Secondly, statistical data tells that Chinese government invests more than other main countries. The government investment is undoubtedly a factor to prompt Chinese economy because the total investment has an important role in Chinese economic growth. Thirdly, fiscal policy stance estimated from the prime surplus tells the character of Chinese fiscal policy, which is a lean against the wind policy. Finally, from the model’s impulse responds functions it is obvious that the government’s expenditures on investment and consumption can pull inflation increasingly while they stimulate the economic expansion. The government investment has more impacts on both economic growth and inflation than government consumption. But the government expenses have different impacts on two types of households represent crowding-out and crowding-in effects in different households. Although the total value of private consumption is rising after the government expense shock, the proportion of private consumption to GDP is declining immediately and reverts to steady state slowly after that. This is a obviously crowding-out effect of government spending resulting from the DSGE model in this paper and the same as the statistics data in China after the year2000.