The Advanced Research Of Inflation And Asset Substitution

The inflation in China seemed to appear in the second half of2010. In July,2010,TheCPI index which reached3.3%has exceeded the level of the international line.Sincethen,the index was surging,and achieved a record summit of6.5%inJuly,2011.Visibly,the domestic inflation situation is not optimistic.Even moreworrying is that,along with the domestic inflation rate,s climbing,the public,sexpectations of inflation continue to heat up.Because of high expectations ofinflation,many people have their stocks,real estate,gold,art,and anyother assets whichfight agaist inflation risk replace their cash,demand deposits,saving deposits etc,inorder to have their wealth hedge against inflation and appreciate,which results in therise of asset prices.In turn,the asset prices,continuous rise expedites the process ofasset substitution,some scholars such as Li(2010) worry about asset substitution willpush up inflation.In this paper,we use the improved Sidrauski utility model,along withObstfeld-Rogoff,s monetary dynamic map,and then we conduct series of rigorousmathematical derivation,ultimatly,we conclude the dynamic path of inflation in thecontext of asset substitution.To a brief outline,the specific path as follows:in theperiod of high inflation,asset substitution does not worsen the inflation situtation,onthe contrary,asset substitution will slow the pace of inflation as a whole,just like thesand is scattered inside the accelerator which operates with rapid speed.That is tosay,at the beginning,the inflation rate will continue to climb,however it slows downsignificantly,at last,the growth rate of inflation becomes negative,resulting in thereduction of the inflation rate.To verify this theoretical conclusion,we have1998asthe boundary,collecting two samples from May,1992to May,1996,April,2007toAug,2011,and then we use them to conduct empirical research,through unit root test tothe real money balances and the inflation rate,and the cointegration test between thereal money balances and the inflation rate,as well as the final SW regressionanalysis,ultimatly,we verify conclusion derives from the theoretical model.However,inthe empirical analysis,we got the opposite result to our expectations,in the sample ofApril,2007to Aug,2011,the elastic between real money balances and the inflation rateis postive,that is to say,both variables go in the same direction.An explanation,realestate investment does not become the family,s main investment,and even the stocksdo not become a major component of household assets.This reason,we will explain indetail in the body.