The Effect Of Terms Of Trade On Chinese Inflation Under The Open Economy

The new Keynesian Philips curve (NKPC) is one of the mainstreams models for the current evaluation of monetary policy and economic cycle analysis. Starting from the Gal and Gertler, many scholars set up NKPC model to analyze the influence factors of inflation. But most of the available estimates are derived under the condition of closed economy. With the development of economic globalization, the connections of the countries increasingly close. The role of the international impact on country’s price level is playing an increasingly direct impact. Under this background, only consider the effect of domestic factors is far from being comprehensive explanation for a country’s inflation dynamics mechanism. And along with the deepening of China’s reform and opening up, China’s economy is more closely with the international economy. When discussing the influence factors of inflation, the domestic scholars generally agree that the influence of international inflation dynamic analysis has become a factor of domestic inflation that can’t ignore. The purpose of this paper is to build open NKPC model under the condition. To inspect the external macro factors such as changes in terms of trade, as well as the internal factors such as expected inflation factors’impact on a country’s inflation.This paper establish both the open and closed economy New Keynesian Phillips Curve, we introduce the terms of trade into the open economy NKPC model in order to estimate the impact of the international relative price fluctuations inflation transmission mechanism on the domestic price level. By applying the data from1994to2011into the empirical comparison analysis, we find that the terms of trade in open economy has a substantial influence on domestic inflation and weakens the effect of output gap on inflation dynamic, which means terms of trade has emerged as a more relevant inflation driver; compared with the current terms of trade, expected terms of trade change on the influence of inflation is more apparent. Combined with import and export structure and industrial level entity economic data, further analysis indicates that the international inflation transmission mechanism of terms of trade has remarkable effect on domestic price level because of the rigid import demand, weak export negotiation force and incomplete exchange rate transfer, and the deterioration of expected terms of trade drive up domestic price level through direct and indirect influence. Finally this paper presents a few relative policy recommendations.After the American’s subprime mortgage crisis in2008, the developed economies implemented quantitative easing policy. China also determine the macro economy toward policy in November2008, introduced a series of proactive fiscal policy and a moderately easy monetary policy. That is bound to inject large amounts of liquidity to the market. This round of crisis caused by the quantitative easing will in a certain extent affect the forces of terms of trade on our country inflation. For further discussion the size and the direction of the influence, in this paper, on the basis of previous analysis, monthly data use November2008as time limit from January2002to December2012for empirical analysis, to discuss the influence of the change after the crisis. To analyze the terms of trade of international inflation conduction significantly affect inflation in China, the cause of the effect change after the crisis, the author combine macro-economic and foreign trade data in China, provide data support and empirical support for related conclusions of inflation conduction effect of terms of trade.Based on the above analysis conclusion, this paper gives the relevant policy recommendations.