The Dynamic Mechanism Of Inflation In China And The Choice Of Monetary Policy

Inflation is a major issue that related to the political stability and social harmony of a country,and it is also the main goal and fundamental starting point of the macroeconomic regulation and control in various countries.At present,our country is in the pivotal period of adjustment,transition and upgrading of the national economic structure,ensuring the smooth operation of the economy is a crucial prerequisite for the realization of national strategy and livelihood development.Under the new normal,it demands to proceed from the new periodical features of China’s macroeconomy to profoundly understand and scientific control the inflation.We should recognize the development and change of the environment from a dynamic perspective,clarify the influence mechanism of internal and external factors on inflation,and explore the policy choice in this process.Therefore,the purpose of this paper is to discuss the dynamic mechanism of inflation.On the one hand,starting with the characteristics of inflation,to dig deeply into the evolution law and influencing factors of the inflation process under the New Economy Situation;On the other hand,from the perspective of the causes of inflation,selecting representative shock sources to further analyze the functional mechanism of the internal and external shocks on inflation,and how to match the effective monetary policy to implement regulation and control.The specific research contents and main conclusions are as follows:(1)Identifying the volatility characteristics of inflation in China and making quantitative analysis of the main factors that affect the price fluctuation in China.By constructing a GARCH family model,it is fouded that China’s inflation fluctuations have the characteristics of aggregation,asymmetry and spillover.Therefore,in the current period of China’s economic growth shift,it is suggested that the monetary authority should adhere to a stable policy tone,improve the transparency of the policy and guide the public to form a reasonable expectation,in order to avoid the price mechanism distortionemergence and welfare loss under the situation of "high volatility,high inflation" situation.Further,in order to study the main factors that affect the price fluctuation in China,this paper uses factor analytic method to decompose the causes of inflation in China.Firstly,we find four main factors: cost factor,demand and monetary factor,wealth factor and international factor.Secondly,by calculating the factor loadings,it is founded that since 2004,the cost factor has the strongest explanatory ability to the fluctuation of CPI,and the secondary explanations are the international economic impact and the influence from the demand pull and the money supply.Finally,we find the main factors that affect the price increasing in each round by calculating the factor scores.In early 2008 and the second quarter of 2011,the cost factor gets the highest score,and during that period of time,the food prices,raw material prices take turns to rise become the main cause of the inflation.In the first half of 2007,the demand and monetary factors get the highest score.During the period of time,the high demand under rapid economic growth and the expansionary monetary policy are the main factors that cause the inflation.In early 2010,the wealth factor gets the highest score,and the continuous rise in asset prices that represented by real-estate is the major contributor to inflation.At the beginning of 2007,the highest score belongs to the international factor.During that time,the boom of the world economy and the rise in crude oil and other commodity prices are responsible for the inflation in China.(2)Analyzing the dynamic characteristics of inflation persistence then testing the correlative mechanism between inflation and its persistence and monetary policy.In this paper,the IMS-AR model is used to estimate the persistence of inflation in China,it is founded that the inflation persisitence diplays a significant time-varying characteristics and zoning characteristics.Before and after the 2008 financial crisis,the inflation persistence level reaches the highest,but it has significantly weakened since 2012,but still at high level.Further,by constructing a TVP-VAR model with five variables,we find that: First of all,the effect of monetary policy regulation is characterized by a significant time-varying feature.In the context of the big expansion of monetary policy in 2008,the "quantitative" monetary policy exerts crucial effective on price regulation in short-term,while the “pricing” monetary policy shows distinguished effective on long-term,at the same time,the adjustment of interest rate levers the inflation persistence.In contrast,under the tone of tighter monetary policy in 2010,both of the monetary policies have improved on regulating the inflation.Secondly,as a whole,monetary policy has realized more regulations of inflation itself,but at some point in the change of the policy tone,two monetary policies do not make inflation into a new regime.Finally,the inflation persistence exerts a strong positive spillover effect on inflation itself,meanwhile,the inhibitory effect of inflation persistence on economic growth is also particularly far-reaching in the long run.Therefore,it is suggested that policy authorities should pay more attention to the regime and transition probability of inflation persistence,and use more structured policy tools to regulate.At the same time,in view of the high level of the inflation persistence,when dealing with inflation,monetary authorities also need to carefully grasp the timing and intensity of policies,fully consider the public expectation to carry out forward-looking regulation and reduce the cost of policy.(3)By using the time-varying coefficient state-space model,this paper studies the trend characteristics of the "output-inflation" Phillips curve in China and the mechanism of economic cycle on inflation.The empirical results show that the slope change of Phillips curve has obvious time-varying characteristics.In the long run,macroeconomic fluctuations have a certain degree of pro-cyclical pulling effect on inflation.While in the short term,the correlation between the two will vary according to the economic environment.Specifically,in the period of "high growth and high fluctuation",the slope of the Phillips curve is positive and and the slope is large.During this period the inflation maintains on a high level.The government should pay attention to the spiraling upward spiral of prices caused by the corporate price adjustment and adopt a tightening macroeconomic policy that focuses on balanced and inclusive development.In the period of "low growth and high fluctuation",the slope of Phillips curve is negative and the slope is small.At this time,the economic structure is out of balance,deepening the reform and adjusting the mode of economic growth are the fundamental measures to stabilize prices.In the period of "low growth and low fluctuation",the slope of Phillips curve is positive and the slope is small,which means the unemployment rate is high and the market structure still has problems.The government should pay attention to the potential risks of deflation and take targeted expansion measures to guide scientific consumption.At present,the Phillips curve in China presents a flattening trend,which means the impact of economic cycle fluctuations on inflation has weakened,but special vigilance should be paid to the abnormal fluctuations in prices so as to prevent the government from paying greater costs to control the economic cycle in order to maintain price stability once the inflation is aggravated.(4)Examining the relationship between asset price and inflation and discussing the monetary policy regulation model.First of all,the MS-VAR model is used to divide our economy into three different regimes,"deflation","low inflation" and "inflation".Among them,"low inflation" regime is the most stable and has the longest duration,while "inflation" regime has the weakest stability.And the "low inflation" regime is easier to transfer to "inflation" regime.At present,our country stays in "low inflation",so the government should be alert to inflation risks.Secondly,the real estate prices in these three regimes all show an indicator of the change in inflation,while,the relationship between stock prices and inflation is weak.Real estate price usually fluctuates precede the inflation in 2.5 to 3 years.Therefore,focusing on real estate prices is beneficial to improve the monetary policy’s perspectiveness and pertinence.The mometary policy which aims on the inflation to regulate the real estate price would gain good feedbacks.Finally,from the perspective of inflation and asset price,the control of "quantitative" monetary policy is more effective in China,and its regulatory effect shows significant regime characteristics.In the "deflation" regime,"quantitative" monetary policy has a significant impact on inflation,but it fails to regulate the real estate prices effectively.In the "low inflation" regime,"quantitative" monetary policy shows lagging in regulating inflation,but the initial effect on real estate price control is very remarkable.In the "inflation" regime,the "quantitative" monetary policy has a good effect on the early regulation of inflation and real estate prices,but it shows little secular or consistency.It indicates that in the period of high inflation,the adjustment effect of "quantitative" monetary policy for both are marginal decline,and it is necessary to further optimize the framework of monetary policy,and use innovative policy tools to strengthen directional regulation,camera regulation and precise regulation,so as to achieve stable and effective regulation goals.(5)Studying the impact mechanism of external shocks represented by the commodity price change and exchange rate fluctuation on inflation in open economy.Firstly,using Bayesian MF-VAR model and traditional VAR model to do the regression analysis,it is proved that the mixing model is able to make full use of sample information of different frequencies and reduce the estimation deviation,making the estimation more accurate and effective.Secondly,it proves that the change of international commodity prices would exert significant positive impact on the domestic price and bring about an imported inflation.Finally,exchange rate changes would exert negative effect on inflation in China.Relatively speaking,the impact of commodity price changes is more intense and long-lasting.Therefore,in order to better stabilize the domestic price level,it is suggested that,we need to grasp the strategic opportunity of "the Belt and Road",the regional demand led by China may be formed in the process of expanding overseas investment channels,which will let China master the bargaining power to a greater extent and participate in to influence the pricing rules of commodities.At the same time,the monetary authority should continue to deepen the reform of the exchange rate system,promote the process of RMB internationalization,and strive for the conversion of RMB from the settlement currency to the valuation currency,in order to improve the ability to resist external shocks,reducing the adverse effects of input factors on China’s price stability.All of these stated above are the main conclusions of the empirical research of this paper on the dynamic mechanism of inflation in China based on the perspectives of monetary policy and internal and external shocks,which expound the inflation dynamic characteristics,formation mechanism and monetary policy enlightenment,in order to provide a valuable reference for the management of inflation and macroeconomic control in China.