Empirical Research Of Macro Stress Testing In Residents Inflation Affordability Based On Wilson Model

For residents of a country, the impact of inflation brought to life cannot be ignored. Especially in the background of the post-crisis, reviving the economy and stimulating investment, countries have been putting efforts on making easy-money policy to promote the development of economy. One of the most typical manifestation is that there are more and more money while higher and higher price in the market. Under the circumstances of mounting inflation, people will inevitably become the brunt of victims. But we don’t know how much damage did a country’s inflation cause to the residents. What we can do is just carrying out a qualitative analysis in terms of the price level. It is difficult to set a measurable standard for the damage.Through reading plenty of literature research, I found that many scholars tend to study the incentives and influence about the level of inflation or price and rarely focus on residents reflects and performance when facing inflation. Even though some scholars made deep analysis of the damage that residents beared before when inflation occurred in a country, the analysis are just made by a qualitative and theoretical way, not using quantitative data. The result is not intuitive. Therefore, in order to reflect the level of inflation more intuitively when our residents face it, we used the method of quantitative analysis to present it and established a definition to describe——the residents inflation affordability. The meaning it represents is the degree of tolerance of residents when facing the rising prices in the case of national inflation. This is not only a measure of the extent of the impact of inflation to bring living standards, but also a reflection of residents of psychological expectations. It is a definition including both subjective and objective elements. Therefore, on. the basis of previous research methods about inflation affordability, we firstly separated residents consumer demand of rising price into two parts——income effect and substitution effect through microeconomic theory, Slutsky function. The substitution effect is the changes in consumer demand purely due to rising price. Then combined with econometric software, we established Cointegration between residential consumption and income so as to get the residential long-term income elasticity of consumer. Finally, bring the result to the defined formula, you can get all the annual specific data of affordability when residents face the inflation.Structure of this paper consists of five parts. The first part is an introduction. Its main content described significance and background of the topic, and made a comparative analysis on inflation and inflation tolerance between our county and foreign countries, which gave us a brief introduction about research methods and ideas. The second part is a overview on residents inflation affordability and stress test, describing how to define residents inflation affordability, how to deduce the derived variables related to residents inflation affordability, the concept of stress testing, stress testing classification, steps and processes according to economic theory. The third part is the preparation of stress test, whose main content briefly discussed methods and procedures on Wilson model and filtered and removed the explanatory variables and the explained variables. We obtained the residents of long-term income elasticity of consumption through econometric software so that we can get specific numerical data of inflation affordability into the formula. Then make further processing to macroeconomic variables by seasonal adjustment and stationary. Finally we determined the pressure factors to conduct stress tests and got the primary variable regression equation between the explanatory variables and the explained variable. The fourth part of the center of this article, on the content of China’s residents inflation affordability tested under pressue by Wilson model, including different designed stress-conditions and stress testing. The fifth part is the conclusion, policy and recommendations on this stress test study based on the results of empirical research. We analyzed China’s current macroeconomic situation and made some suggestions about our empirical research detailed analysis.In this paper, we considered redefined inflation affordability as the object of study. By the introduction of relevant macroeconomic variables and using econometric software to make a regression analysis, we are going to study how residents inflation affordability changes in the macroeconomic environment, in order to find out factors and make some suggestions in policy. Method of research is based on stress testing in the credit risk of commercial bank and draw lessons from one of the typical representative model——Wilson model. The method is simple, a representative macro stress tests which is often used to assess the risk endurance of the financial system when extreme conditions and external shocks occur. So we followed idea of Wilson model, making the residents inflation affordability as the object instead of commercial bank’s credit risk indicators. The purpose is that we hope we can discover something new from these designed pressure situations in order to make proper response and take timely remedial measures.