Empirical Analysis Of The P-Star Model To Explain And Forecast Inflation In China

Inflation is an important reference index of macro-economic policy adjustment, it relates to the healthy development of one country's economy and social stability. Currently, the Chinese inflation rate keeps to rise, so China have taken a series of policies to repress the inflation actively, such as interest rate policy:one-year deposit rate rise to 3.25%, one year lending rate to 6.31%level, this is the second time to adjust the deposit and lending rate level in 2011.Clearly, Chinese inflation has already exceeded the level that the market can bear. Therefore, it is very important to estimate the inflation accurately to the policy makers.According to the quantity theory of money, the thesis establishes the P-Star model to estimate inflation, and uses the econometric method to examine whether the real price level and long term equilibrium price level exist the stable relation or not. On this foundation, the thesis studied the P-Star model as a model to estimate inflation and the interest rate, exchange rate and foreign exchange reserve how to affect the inflation in the short time.By empirical examination, the thesis gets a few conclusions that, long term equilibrium price level can be indicator to estimate inflation; Velocity gap and output gap have significant effect to inflation change; The interest rate and exchange rate have negative effect to inflation, but have time lags; The interpolative prediction and Extrapolative prediction results show that the P-Star model performs better than ARMA model when forecasting the Chinese inflation.