The Phillips Curve In China And Inflation Expectations Management

As an important support for Macroeconomics, Phillips curve can link together inflation, unemployment, output gap, and other important economic variables. It has become policy tools that can interpret economic fluctuations and explain the macroeconomic policy. Economists were in the deepening of research on Phillips curve, and they began to pay more attention to the additional expected inflation curve. In particular, the introduction of inflation expectations to the Phillips curve can well explain the "stagflation" phenomenon in the 20th century , 70 years all over the world, and the curve put forward effective policy recommendations. By Friedman, Phelps, Lucas and others continued to expand, it eventually reached a basic consensus on the formation of the additional expected Phillips curve.Inflation expectations, refer to an estimate of the public on the inflation that will occur the next period. And this expectation has a strong subjective, although the public base it on all sorts of objective facts. The additional expected, which means inflation expectations is the strength depended on t the economic environment, and will interfere the good alternative formatted by the original Phillips curve. This force also makes a conscious government policy to inflation, and thus be in control on the future trend of inflation to some extent. To be sure, inflation expectations have a decisive influence for each country's price stability and healthy economic development.The development of inflation expectations, first began in the monetarist proposed augmented Phillips curve, which introduced the adaptive expectations; to the school of rational expectations, the Phillips curve has the form will be characterized as the form will be expected to be characterized as rational expectations; Later, after the rise of the New Keynesian's amendments ,new kind of curve are found such as the hybrid Phillips curve, sticky information Phillips curve, structural run Phillips curve, which give a new interpretation of inflation expectations.In practice, inflation has been formed will often continue for some time, people call which inflation inertia. And the inflation expectations is the reason for this inertia. Many factors affect the public expected, such as early changes in the general price level and development trend, the status of the current economic environment, one government or even the global policies of the economy, the government and relevant departments to keep his promise, the credibility level of implementation, and so on. Inflation expectations often affect people's investment, consumption behavior. If consumers and investors formed a clear tendency of inflation expectations, in the absence of effective government intervention in economic policy, it is difficult to avoid the promotion of real inflation. New world economy is immersed in the possibility of global inflation, so the research on management of inflation expectations for monetary policy makers and practitioners - central banks, are very important.How do our residents to take the form of inflation expectations? We discuss the form of the inflation expectations. First we assume that firms adopt mixed expectation to price, that manufacturers changed the wage and price in the reference to past information and future expectations. Then we form the Phillips curve based on the output gap.π1=αy₁ +ω_iπ_1-1+ω_j E(π₁₊₁+ε₁π₁^e=ω_iπ₁₊₁+ω_iE(π₁₊₁) is the form of the residents'inflation expectations in our model to estimate. It is reference to the backward and forward reference expected compositions. To use GMM estimation, we selected variables'quarterly date from 1994 to 2010. Output gap is defined as the relative difference between real output and potential output ,which is estimated by the HP filter. In order to estimate the endogenous variables in the model we selected two sets of instrumental , first order differential of the U.S. inflation rate and the first order lag of the macro-economic climate of the leading index . Empirical results show that, first, the output gap coefficient are 0.11 and 0.14, indicating that the expansion of the output gap will generated inflationary pressures. Second, expected parameter is greater than zero, indicating that the components of the inflation expectations include both forward and backward reference to the expected. And ? i ? ?j means the effect of rational expectations affecting actual inflation rate is stronger than adaptive expectations, but also means that China's population is expected to form rational expectations. Third, from the combination of these estimated parameters, we get the fitting curves between actual inflation rate and the estimated inflation rate. We take the stability test to the model, there are no fluctuations in the 0 unit root. All this shows that we are based on reasonable assumptions and estimates to set the model. Based on the empirical analysis above, we further discuss the management of inflation expectations. Whether inflation targeting which is one of the ways to manage the inflation expectations, is suited to China's central bank or not? The issue was widely discussed domestic scholars, but so far inconclusive. Lot of the current economic theory and practice indicate that stable and reasonable public expectations of inflation in one country can ensure the national economy smooth running and the economic growing sustained and effective. With the constant development of China's economic strength and the market continue to deepen the sound operation system , ensure sustained and stable price level play a crucial role to political and economic environment of China. We must see that by using this way of monetary policy, it will lead to a more stable macroeconomic environment in our country, and when in the face of sudden shocks, we will guide to be calmly. But we must recognize that adopting this form of monetary policy in China, the economic policy environment will be more demanding, such as requiring the central bank to be more clear and in depended, enhancing the transparency of policy, the more accurate prediction of future inflation and the control of the deviation from the inflation target range. Accelerating the pace of development of financial markets and strength cannot be ignored, especially in the process of marketization of interest rates and improve the exchange rate formation mechanism. Only the effective management of inflation expectations and practical monetary system of inflation targeting can make sure China's economy running stable and healthy.