Estimated That China's Inflation Expectations

In the mature market, the research with characteristics and its formation mechanism to the inflation expectation has been the important topic to the currency economics and finance. Inflation expectation not only bring about direct influence on the effect of National Central Bank monetary policy, but also have a closed relation to the expect of wages, price level, economic unit and personal of investment or consume decision, it is a important decision factor to the real inflation. To the expectation of the research and the application, the problem wanted to resolve an expectation to be turned by the quantity first.This text summarized the studying of inflation expectation to the domestic and international scholar, and analyzed the advantages and disadvantages of static state expectation, extrapolation of expectation, adaptability expectation and rational expectation. We used the method that Burmeister and other scholars used to estimate the expected inflation. Based on observed monthly interest rates and inflation series, I model the unobserved inflation expectations and ex ante real interest rates in a state-space representation, which can be derived from a potential VAR process. The state-space model and inflation expectations can be estimated using Kalman filtering. The empirical results show that the mean of expectation errors is close to zero, consistent with the rational expectation hypothesis. Besides, the variance of expected inflation rate is only a half of effective inflation rate and the expected value is much more smooth than the effective value. These results not only match people's economic intuition, but the standard deviation of the error from this month to the next month is only 0.26 percent in this paper.On base of learning predecessors' inflation expectation model, this paper tries to expand the foundational model by add a new variable—Mo, so as to combine the estimated inflation expectation with the money need equation. We operated the model and analyzed the results, and reached the following conclusions: 1, inflation expectations and monetary demands exist significant negative correlation; 2, the income elasticity is 0.2, that means for every 1% increase in transactions, money demand will increase 0.2% ; 3, interest rates and monetary demand exist significant negative correlation; 4, the price level, income or inflation expectations changes, which will lead the gap between cash holdings and demand to be adjusted about 26% ratio within a month; 5, in the long term, demand for the currency income elasticity close to 0.8, and the conclusions is not consistent with the scholars abroad (foreign scholars study shows that the income elasticity is around 1), resulting in such differences may be due to our use of cash as currency and use of retail sales of consumer goods as income sequence;6,long-term interest rate elasticity is less than zero, indicates that with the increase in interest rates, it will reduce the demand for the currencyAt the end of the article, the author used the modified model of inflation expectations to estimate Chinese Phillips curve which contains inflation expectations. The author gets a satisfied result. The result of the model shows that there is a obvious positive correlation between inflation rate and produce indentation. It also shows that inflation expectations influence inflation evidently. As we investigate in-depth, we can find that the actual effect of macro economic policy lies on the impact of economic expectation. Thus it can be seen that central bank could not consider only one period. Central bank should keep its money policy coherent when it tries finding the balance between inflation and produce or obtain employment. Moreover, forward-looking pricing behavior dominates others, expectation has a greater impact on the macroeconomic, and an effective monetary policy must be forward-looking. Model also shows that the majority of vendors according to changes in economic conditions promptly adjust prices, this shows that they are more sensitive to the macroeconomic policy makers. Therefore, in order to avoid excessive fluctuations of the economy, the central bank's monetary policy should be robust.