The Research Of Chinese Inflation Welfare Cost

Since our country founded, Chinese inflation was sometimes on the hidden ,high and low. Along with the reform of the socialistic market economy, the researches on the economical theory began to touch the aspects which had not been did before the reform. And the research on inflation was the one of these aspects. The introduction of Western inflation theories were acquired as the accumulation of the knowledge for the development of the inflation theory in China. So on the basis of this, and on the basis of the special economical circumstance, after investigation to our economical inflation, our scholars created the inflation theory with Chinese characteristics.From the point of view of the inflation causes, there are some theories to explain Chinese inflation, including demand-pull theory,cost-push theory,synthetical theory and the structural inflation theory and so on. Although these theories have the same names to the Western theories, but they are widely divergent with them. For the structural inflation theory in the transition process, the causes of inflation were not only the effects of the revenue comparison between state-owned enterprises and non-state-owned enterprises, but also the "state-owned capital trap" problem on the survival loans inclined to state-owned enterprises. These are caused by Chinese special economic systems.Usually, people believe that inflation will bring tremendous welfare cost to the society and lives, but Lucas estimated that when the nominal interest rate was 10%, the welfare cost would be 1.3% of GDP in his 1994 artical. This result appeared to be very small, so many scholars were startled. As early as in 1956, Bailey had estimated the inflation welfare cost by calculating the area below the inverse monetary demand function curve. He had come to the conclusion that when the nominal interest rate was 6%, the inflation welfare cost would be less than 0.3% of GDP.These results of the two models about the inflation welfare cost were not large, while what about the inflation welfare cost of Chinese economy? And what are the impacts of the inflation welfare cost on Chinese economy? These are the questions which will be dealt with in this artical. Chinese scholars usually did the qualitative analysis on this aspect, like on what aspects the inflation would bring to effect, and then gave the political recommendations. Or they would change the inflation welfare cost model, then estimate the welfare cost when some other interrelated factors are changed. On one hand, we think that it will be not enough to estimate the inflation welfare cost by the qualitative analysis merely. Once we could estimate the inflation welfare cost by the quantitative analysis, we can use the theory much better, and we would also draw up the policies more in line with Chinese characteristics. On the other hand, this artical will explain the cause why the Bailey(1956) and Lucas(2000) models can be used in Chinese economy. Then we will test them, and at last we will estimate Chinese inflation welfare cost by these two models.In this artical, using the data from 1992 to 2005, we will estimate the form of monetary demand function at first. After this function is examined by the OLS method, we select the log-log monetary demand function as the model with Chinese economical characteristics. Then we use the customer surplus model by Bailey(1956) and the income compensation model by Lucas(2000) to estimate Chinese inflation welfare cost. Comparing to the results of the two models, we accept the conclusions of Lucas income compensation. We believe that the nominal distortion will bring about the social welfare costs. Excessive distortion has suffered serious social welfare costs. Therefore we must treat the inflation seriously. That means the inflation rate must be not too large, nor too small.