| Now many central banks of developed countries released core inflation index and the index is seen as the basis of making monetary policy. But China is the only one of the world major economies which does not release core inflation index, the traditional index we are using now, such as the consumer price index (CPI), which can not reflect the real situation of inflation. In this background,the people bank of China starts to refer to core inflation index when they analyze the situation of inflation and make monetary policy, but our country did not measure and regularly released core inflation index. The paper based on this background start to study the core inflation index of China. The paper is mainly divided into the following several parts.The paper has the literature related to core inflation at home and abroad, and I analyze and expound the concept of core inflation of core inflation definition and measurement methods. On the basis of analyzing the literature of domestic and foreign, we define the concept of core inflation. Core inflation index is on the basis of the CPI and deduct the temporary,non-monetary factors(tax policy, government regulation) affecting the index. It reflect the part of price which is long-term trend and stable. There are two main measures of core inflation, statistic method and model method. For there is no clear line between core inflation and common inflation,so it is very difficult to measure core inflation. Now, mainstream methods can not meet the requirements at the same time, such as forward looking, computable in real time, having sound theoretical basis, understand by the public and history does not change. For measuring core inflation based on core inflation has the basis of economic theory. So the paper uses this method to measure China core inflation.The paper estimated China core inflation index through a four-variable SVAR model, including output, money supply, inflation and food price,using the data from January of2001to December of2012. We use the year-on-year growth rate of industrial added value as representatives of output indicators, use M2as representatives of money supply, use CPI as representatives of inflation indicators and use food price index as representatives of food price. We get core inflation index from January of2001to December of2012through a four-variable SVAR model. Then we compare it with CPI, we find they have the same crest and through. But the volatility of core inflation index is smaller than CPI, this shows that core inflation index can be a good indicator of the potential inflation trends. So when the central bank makes and implements monetary policy, it not only needs pay attention to CPI, but also needs to pay attention to core inflation index.Then the paper analyzes the core inflation and monetary policy and it mainly is divided into three parts. First I expound the importance of monetary policy focus on core inflation index, which is beneficial for the central bank to predict the future situation of inflation, is beneficial for the central bank to maintain monetary policy robustness and is beneficial to maintain the credibility of the central bank monetary policy. Second analyzing the effectiveness of monetary policy in our country. Through the analysis of the correlation of core inflation and monetary policy index, the result shows that china monetary policy failure. Because in the past,the people bank of China monetary policy is not focus on core inflation index. However due to core inflation represents the sustained, stable part of the inflation, it is better than CPI in the place reflecting the price level in the future long-term trends. Monetary policy should not just focus on traditional inflation index, it should also focus on core inflation index, otherwise may result in misleading monetary policy. Third I review the situation of CPI and core inflation of our country, take our country economic situation changes of January of2007to December of2012for examples to explain the central banks response to it and the decisions it made.The paper estimates core inflation index through a four-variable SVAR model, analyzes the core inflation and monetary policy and get some important conclusions. The paper argues that in China the people bank of China should try to establish scientific index system of core inflation and regularly released core inflation index, guiding the public to form the reasonable expectations of inflation, and see core inflation index as the important basis of making monetary policy. |
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