On the causes of China's current inflation

and policy recommendations

Posted:2009-9-24 16:33:00   Browse:28323 chinese Version

     [Paper Keywords] inflation; excess liquidity; monetary policy; exchange rate policy
     [Abstract] inflation is a country's Economic Health and stable operation of the enemy, in view of our
country since the first half of 2007 to the price index rising inflationary pressures, the reality of increasing
economic performance, the article on the current characteristics of China's inflation , cause analysis and in
order to provide relevant recommendations.
  
      
      Since the March 2007 China's consumer price index (CPI) rose more than 3% since the price index has
been high, in February 2008 once reached a high of 8.5%, whether the people or the government feel the CPI
rise caused by pressure. Therefore, to maintain price stability and achieve sound and rapid economic growth
has become the primary task of China's macro-control. In this paper, the characteristics of current inflation,
the cause of the formation of analysis and policy recommendations.
      
     1, the current inflation, the characteristics of
     First of all, inflation has a non-equilibrium nature. Consumer prices mainly focused on food prices,
especially pork, eggs, cooking oil and so on, as of May 2008 all kinds of food prices over the same period the
previous year rose 21%, of which meat and poultry and related products rose to 43.5% ①, but the non-food
price inflation is extremely limited, some of the items or even declined.
      Second, Investment in fixed assets increased markedly, the phenomenon of over-investment has not been
effectively checked. 1 ~ May this year alone, China's urban fixed-asset investment was 4.0264 trillion yuan, a
year earlier, compared with growth of 25.6% ②. In the rapid economic growth, fixed investment in
overheated circumstances, long plagued China's economy the proportion of investment and consumption
Structure and industrial structure, the three major problems not only has not been effectively improved, and
getting worse. In such a state, the high economic growth and excessive investment growth from causing
inflation will become the driving forces.
      Once again, housing, land prices continued to rise. 2008 1st quarter of 70 large and medium cities
nationwide housing sales price rose 11%, rental prices rose 2.1%, land transaction prices rose 16.5% ③.
Since China's CPI in the calculation of housing, when not taken into account, so housing prices in the CPI
index has not been fully reflected. However, rapid increases in house prices has caused a great living affected.

      Finally, because rising prices lead to lower real purchasing power of the yuan, so that the one formed
internal devaluation of the yuan, but in the international market against the U.S. dollar and other major
currencies appreciate. This shows that China has emerged a certain degree of inflation, but there are
significant structural features. Analysis of inflation and its causes and take appropriate measures to avoid the
obvious, the outbreak of full inflation as problems to be solved.
      
     Second, the current causes of inflation
     Western economists believe that there are three main types of inflation: demand one way or another type,
cost-push inflation, and structural. In addition, in an open economic environment, the international
transmission of inflation is also a country (region) appears important cause of inflation. The author believes
that the current inflation in China's emergence can not be simply classified as a certain type, but rather the
result of a variety of factors. Detailed analysis mainly in the following three reasons.
      (A) food prices, especially meat, eggs prices mainly affected by rising production costs, its own Industry
characteristics, market cycles, the impact of supply and demand structure
   Abstract: The formation of inflation expectations is an important factor in inflation, it depends on a
country's market-oriented, public understanding of common sense on the economy, public confidence in the
Government, the public in the past and present Economic situation assessment. In addition to the expected
impact of inflation, wage negotiations outside the channel, to a large extent also depends on the producer's
market position and the resulting increase derived from the degree. China's inflation is expected to have their
own characteristics, take advantage of these features help to grasp the monetary policy in the short term and
long-term orientations.
     Keywords:: inflation; expected; monetary policy
     
     Inflation is expected to push inflation point of view has been widely accepted by the academic community.
National central bank inflation expectations remain increasingly high vigilance, and along with the constant
improvement of China's economic reform, inflation expectations will also have a substantive impact on
China's inflation rate, therefore, inflation is expected to include areas of monetary policy formulation bank
regulation inevitable.
     
     First, inflation expectations and its implications for monetary policy, the meaning of the importance of
     
     From an economic sense, "expect" is the most future value of the economic variables forecast. This
concept is introduced to the theoretical studies of inflation have become the distinction between the
traditional and the contemporary theory of inflation, an important symbol, as the representative of the
monetarist school inflation theorists Helm Tefulixi in 1986 stated that: "Over the last fifteen years developed
the theory of inflation and the traditional theory of inflation, the main difference lies in whether it is aware of
the role of inflation expectations." This author of "inflation expectations" is defined as: the establishment
based on certain knowledge on the future level of inflation rate or an estimate inferred.
     From the theoretical Development is expected to run, is expected to be divided into "adaptive
expectations" and the "rational expectations." Adaptive expectations (Adaptive Expectations) is expected to
form on the view that expectations are based on the past (history), that is formed only by past experience, is
expected to change slowly over time. Keynesian theory and monetarism in the expected adaptive expectations.
Rational expectations (RationalExpectations), also known as reasonable to expect that for a certain economic
phenomena (such as market price) for the expected time, if people are rational, then they will maximize the
full use of the Information obtained to make action not guilty of systematic errors, therefore, on average.
People's expectations should be accurate. The idea of rational expectations economists JF Musi initially by
the United States in the "theory of rational expectations and price movements," an article for adaptive
expectations in the non-optimal characteristics put forward by the 20th century, 70 years from the University
of Chicago RE Luca Sri Lanka and the University of Minnesota, TJ Sargent and N. Wallace, who made a
further development, economics, called "the expected revolution", and gradually formed an important school
of economics - rational expectations school. Rational expectations school of thought, adaptation is expected to
have a random, there is no rational explanation, that are "expected after", while the rational expectations is
called "rational", it was because it is the light of past history to provide people of all knowledge, right to be
the most effective use of this knowledge, and, after thinking carefully. Made only an expectation.
     I believe that, in addition to distinguish from the expected formation of expectations, but also should make
the main body is expected to be distinguished. The different types of subjects because of different status,
social experience, knowledge levels and richness of information available with regard to future inflation have
different estimates, even if the same type are also expected between the main body there are some differences.
And I also believe that not all types of the actual inflation is expected to have an effect on the future, Western
economics, talked about all kinds of expectations the public is expected to be a comprehensive contest, the
game, the average performance expectations, and only a direct impact on the price of the main body The
actual inflation rate is expected to have an impact. Based on this, the author of the general public is expected
to press a specific breakdown of the main producers of the expected (or operator expected, manufacturers
expected), and two categories of workers is expected, but as retired workers, minors, the unemployed and
other groups, because of its expected price formation does not produce a direct impact, therefore. Such
expectations will be set aside. Areas not included in this study. The reason would be expected under the main
division. Is because these two types of forces in the main body is expected to affect the actual inflation rate
has an important role in the channel, this will be the second part to be described in this article.
  Expectations theory of inflation and employment theory, the theory had a revolutionary impact, which is
mainly reflected in the monetarist right to amend aspects of the Phillips curve and rational expectations
theory. The traditional Phillips curve describes the rate of inflation and the unemployment rate as an
alternative to the relationship between, or to obtain a lower rate of unemployment would have to bear a
higher inflationary pressures, but if it will have to reduce the rate of inflation at the expense of employment
the cost of this theory led to government policies are often in a dilemma. 2006 Nobel Laureate in Economics,
U.S. economist Edmund S. Phelps After in-depth study of the introduction of the Phillips curve will be
expected to put forward the famous "expected amendment to Phillips curve" theory, that is, the rate of
inflation is not only depends on the rate of unemployment, but also on people's inflation expectations, so that
higher inflation would generate a higher inflation expectations, the result is high unemployment rate, the
same can be accompanied by high inflation, rather than the traditional Phillips said low inflation curve. This
would give policy-makers to provide a theoretical basis, that is, to reduce inflationary expectations will lead to
inflation. He stressed that under the action of adaptive expectations. The rate of inflation and unemployment
in the short term alternating between. The long term such a relationship did not exist, and the short term is
not inflation itself. But the actual inflation and expected inflation determines the difference between the level
of unemployment, policy-makers through the development of an unexpected rate of inflation to achieve real
economic indicators such as the unemployment rate regulation, while the long term, policy-makers can not
last long "fool" people. Therefore, the long term the actual inflation and expected inflation does not occur
between the permanent bias, therefore, the long run Phillips curve is a vertical line on the natural rate of
unemployment. Monetary policy in the long run economic growth, unemployment and other control is
ineffective, long-term effects of monetary policy can only have an effect on inflation. The difference is that
with monetarism, rational expectations school of that because people are rational and, therefore, short-term
rate of inflation and unemployment do not exist between the turn. Phillips curve in the short term is a vertical
line, active, discretionary monetary policy both in the short term or in the long run is not valid. Two schools
have a single rule in supportive, only difference is that the monetarist money supply tend to long-term
economic growth rate and the rate of natural increase, the end product consistent with the long-term stability
of prices, while the rational expectations school that the most excellent money growth rate should be
consistent with the ratio of public expectations, and only in line with public expectations of monetary policy is
effective. Set aside two school differences. The academic mainstream view. Central bank's monetary policy is
more regulation and control targets should focus on controlling inflation, rather than other targets.
     
     Second, the determinants of inflation expectations and inflation expectations affect actual inflation channel
Analysis
     
     Present. Inflation and inflation expectations will be included in the academic theoretical Research is a
common phenomenon, inflation is expected to more and more the concern of central banks, inflation
expectations do not quite understand some of the issues, still need to study. Current Fed Chairman Bernanke
at the June 9, 2008 Federal Reserve Bank of Boston, the 53rd annual meeting of the economy "inflation
analysis of outstanding issues" (Outstanding Issues in theAnalysis of Inflation) an article that: "big Most
economists expect inflation as a key factor in the understanding of inflation dynamics, but by what factors
determine inflation expectations and how they affect inflation expectations, are poorly understood. " To this
end, the author both for this problem were discussed.