Empirical Research On The Inflation Formation Mechanism Of China

Inflation is a major problem which has affected national economic development and social stability, and thus has been the close attention of policy maker and academia. In recent years, the large swings of inflation have become an important factors that affect the healthy running of macro-economic and social stability. In this context, to study the formation mechanism of inflation, its significance is mainly reflected in two aspects:First, from the theoretical point of view, it is possible to further improve the currency inflation dynamic characteristics and the theoretical framework of formation mechanism. With the economic development of diversification and globalization, the intrinsic reasons of causing the inflation and its volatility characteristics are complex and volatile, especially in recent years the complex characteristics of the causes of inflation have become more prominent. While the traditional formation mechanism of inflation and the theory of inflation dynamic characteristics are inadequate for interpretation and analysis of current inflation problem that need to be refined and improved; Second, for policy makers, they can use the research of inflation formation mechanism and dynamic characteristics and analysis the different causes and dynamic characteristics of the various stages of inflation in-depth, leading to formulate scientific and rational monetary policy. This will, to a great extent, improve the governance effect of the inflation, which will contribute to the health and stable of economic running. It is based on this background, this paper collects and combs the extensive literature of inflation formation mechanism of domestic and foreign and combines with the reality of China’s situations and statistics to study the formation of inflation mechanism, influencing factors and its relationship between monetary policy by using the comparative frontier theory and empirical research methods and put forward the relative policy recommendations. The main research works are as follows:Firstly, based on the inflation theory of the monetarist school, this paper analysis the short term and long term mechanism of monetary factors and inflation in China and the United States by using comparative study on basis of considering the internal structure monetary aggregates, such as the base currency, the money multiplier and so on.The monetarist school think that the inflation is a monetary phenomenon which caused the price generally rises in the long term. So, it is contributing to a better understanding of the formation mechanism of inflation by studying the relationship between money and inflation. However, by statistical analysis of the relationship between monetary factors and inflation of China and the United States, this paper finds that there exists paradox with the theoretical claims of the monetary school, and then conduct in-depth research.This paper firstly detailed analysis the currency structure and the money multiplier of China and the United States and finds that their currency structures and the money multipliers are not static and there are significant structure break points. Secondly, this paper analysis the short-term dynamic mechanism of the monetary factors and inflation of China and the United States by using VAR model and Granger causality test of the overall sample and sub-sample studies. The empirical results show that the inflation have obvious persistent of China and the United States, but the short-term effects on inflation mechanism of m1and m2are obviously different. Finally, this paper analysis the long-term dynamic mechanism and nonlinear dynamic mechanism of the monetary factors and inflation of China and the United States by using Johansen and the dynamic threshold cointegration test. The results indicate that the impacts on inflation of m2, both in China and the United States, significantly enhance after the financial crisis, while the ml play a certain degree of inhibition of inflation and also draw the conclusions that the two countries’inflation with strong persistence characteristics.Secondly, by constructing a Bayesian Vector Auto Regression (BVAR) model, this paper analysis the impacts response of macroeconomic on inflation and tests the threshold effects of inflation with various threshold variables by using the threshold model.This paper analysis the causes of inflation from the two aspects of the aggregate demand and aggregate supply and economic structure changes respectively. So based on these theoretical analysis and considering the economic operation and data availability of China, this paper research the impulse response of inflation to macroeconomic by constructing the six factors BVAR model of excess liquidity, stock price, output gap, international oil price, the real effective exchange rate and house price, and test the various threshold effects of inflation in different threshold variables by using the threshold model.The impulse response analysis of the BVAR model show that the inflation has a positive impact response to excess liquidity and the cumulative degree of response is the strongest which illustrate that the monetary factor is still the main factor of causing inflation in China. It has a negative impact response to the real effective exchange rate, which means that the revaluation of RMB plays a role in curbing inflation, but this effect is relatively weak. The stock price and house price are the same factors as asset prices, but the impact response of inflation on both of them are opposite, and also for the response intensity. The impact response of inflation on stock is positive, while on house price is negative, which indicating that there is only the wealth effect of the stock price which is mainly due to the different nature of the two assets in China. The impact response of inflation on international oil price is negative which is mainly due to the special structure of China’s energy industry as well as the lag transmission of oil price information.Thirdly, this paper characterizes the formation mechanism of inflation under open economy by using the nonlinear smooth transition regression (STR) model. In the process of globalization of the world economy, the effect of external shocks on the China’s inflation is increasing. Therefore, this paper empirically study the impact of trade openness and external shocks on the inflation of China.Based on the traditional linear model and combined with RMB exchange rate and international oil price, this paper introduces smooth transition model and establish a nonlinear model between trade openness and inflation, and systematically investigate the evolution of relationship between trade openness, RMB exchange rate, international oil price and inflation at different periods and economic stages, by dynamic nonlinear Granger causality test. The empirical results indicate that there exists a significant nonlinear characteristics between trade openness and inflation, and the level of trade openness has an asymmetric effect on inflation, especially when considering the influence of external shocks, the asymmetric characteristic is more significant.It also has nonlinear Granger causality from trade openness, RMB exchange rate and international oil price to inflation in China. While the dynamic nonlinear Granger causality test further suggest that the nonlinear causality relationships between trade openness, RMB exchange, international oil price and inflation are changing constantly.Fourthly, this paper analysis the regional differences of the inflation formation mechanism and carried out a detailed analysis of the regional differences price effect of monetary policy. The theoretical analysis and empirical studies have shown that the formation of inflation is affected by multiple factors. However, due to the existing of the typical non-homogeneous characteristics of the level of economic development, industrial structure and corporate ownership structure, financial structure and economic openness degree of China’s various provinces, it will inevitably has an impact on the formation of inflation which lead to the currency differences inflation levels of the various regions. So these make China’s inflation perform highly running overall, while there are also significant regional characteristics.In view of this, this paper focuses on the regional differences in China’s inflation, and carries out a detailed analysis of the regional differences of the price effect of monetary policy.By using the parametric and nonparametric methods, this paper descriptively analysis the regional differences in inflation and the causing location factors, and finds that the regional differences is a dynamic process, but not a static. Secondly, this paper research the regional differences of the inflation formation mechanism considering the influence of the location factors as transition variables, which are the level of economic development, financial resources, corporate ownership structure and trade openness. The empirical results show that there are two changing points when make the economic development and financial resources as transition variables, while only on changing point when the corporate ownership structure and trade openness as transition variables. And all these empirical results indicate that there are significant regional differences of the inflation formation mechanism in China. Finally, this paper further analysis the empirical results of the established nonlinear dynamic panel model, that is to study the regional differences of the price effect of monetary policy, and the empirical results show that there are also significant regional differences of the effects of monetary policy according with various transition variables.All in all, by using the comparative international forward inflation theory and empirical research methods, this paper further research the inflation formation mechanism of China from multiple angles such as the inflation formation mechanism, influencing factors and the relationship with monetary policy. This studies play a positive role in promoting the research of the formation mechanism of inflation, influencing factors and monetary policy effects, which have some guiding significances for timely and appropriately fine-tuning and forward-looking adjustment of macroeconomic policy of Chinese government. Therefore, the research of this paper has both important theoretic value and practical significance.