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Inflation

The breakdown of the quantity theory of money in China after 2008 financial crisis

CHEN Yanbin;GUO Yumei;CHEN Weize

Economic Research Journal,2015,Vol 50,No. 04

【Abstract】 After 2008 financial crisis, the breakdown of the quantity theory of money in China displays a new feature that expansionary monetary policy with large money supply has not caused inflation which was supposed to be, while it goes with the soaring housing price and government deficit. This paper builds up a dynamic general equilibrium model in the presence of housing sector and government deficit. It shows that the booming of housing bubble and government deficit will enhance money demand of households and government and then lower velocity of money as well as inflation rate. This indicates that housing bubble and government deficit are the key factors to the breakdown of the quantity theory of money in China after the financial crisis. Moreover, the busting of housing bubble will make the quantity theory of money revival and increase inflation rate by 0.5 percentage points.

PIs inflation targeting effective: new evidence from the synthetic control methods

SU Zhi;HU Di

Economic Research Journal,2015,Vol 50,No. 06

【Abstract】 Inflation targeting is a monetary policy pursuing long-term price stability, and more than 20 countries have adopted this monetary policy. This paper applies a novel non-experimental evaluation approach to examine the question of whether inflation targeting is an effective policy tool in emerging economies. We found that the synthetic control method can overcome the problem of policy endogeneity and the bias sample selection, and evaluate the effectiveness of inflation targeting in different countries quantitatively; the inflation targeting can effectively reduce the rate of inflation, keeping the price long-term stable and economic development steady, and even with the exogenous shock, the countries applying inflation targeting got smaller increase of inflation rate. Although at present China does not possess the preconditions for implementing of the inflation targeting, the successful experience of some emerging countries can offer references for our monetary policy.

The nonlinear transmission effect of international factors to Chinese inflation

OUYANG Zhigang;QIAN Li

Economic Research Journal,2015,Vol 50,No. 06

【Abstract】 This paper studies the nonlinear regime switch characteristic of transmission channel of international factors to inflation by extending Gamber and Hung(2001) research frame.Based on this,we build data set of inflation factors and use nonlinear dynamic factor model to reveal the nonlinear transmission effects of international factors to inflation.The results show that international factor effects inflation through trade and capital channels.The transmission effects can be divided into common transmission effects and idiosyncratic transmission effects.Those transmission effects have nonlinear characteristic.With the economic restructuring of stimulating domestic demand slowly,the transmission effect of international factors to Chinese inflation will be weakened.All international factors can be synthesized six common factors.Currently,the international cost factor,international energy factor,international monetary factor and foreign trade factor have negative nonlinear transmission effects to inflation and the international cost factor and international energy factor have larger negative transmission effect than the others.The exiting of quantitative easing monetary policy of U.S.A,the rising of dollar index,the decline of raw material prices and energy prices of international will have negative nonlinear idiosyncratic transmission effect.On the whole,international factors have inhibitory effects to inflation.

Empirical study on transparency of China’s monetary policy

MA Yong

The Journal of World Economy,2015,Vol 38,No. 09

【Abstract】 By using the new Keynesian framework of general equilibrium, a dynamic stochastic general equilibrium (DSGE) model that incorporates the equation for central banks’ behavior and the transparency of monetary policy is established for empirical analysis of the transparency of China’s monetary policy. The estimated results based on quarterly data of China from 1992 to 2013 show that the transparency of China’s monetary policy is in general relatively low. This conclusion is supported by China’s practices and international data. Further analysis shows that low transparency of monetary policy and low independence of the central bank intensify each other, and become an important reason for inflation and economic bubbles.

Population aging and monetary policy: debates and consensus

WU Ge ;ZENG Qingtong

International Economic Review,2015,No. 04

【Abstract】 In developing China, the obvious, fast and intensified population aging has attracted a lot of attention. Population, which was originally a “slow variable,” has increasingly become a “fast variable” in China over recent years. This article summarizes the debates and consensus on the relationship between population aging and monetary policymaking in academia. It finds that the influence of population aging on economic growth is probably mainly negative. It is still quite controversial whether population aging affects the inflation target of monetary policy, and the effects of transmission channels of the monetary policy will differ in the context of population aging. In addition, the special background of “getting old before getting rich” makes China significantly different from other countries in terms of the environment for monetary policy operation.

Mathematical relationship and empirical analysis of household savings and inflation

LI Jun

The Journal of Quantitative & Technical Economics,2016,Vol 33,No. 04

【Abstract】 This paper focuses on researching the effects of inflation on the household savings from two aspects of theoretical study and empirical study. Firstly, this paper builds a mathematical model based on the life-cycle hypothesis, thus establishes the mechanism between the household savings and the inflation factors. Secondly, it proves strictly the positive relationship between household savings rate and inflation rate by using the established model. Lastly, an empirical analysis is made on the numerical relationship between household savings rate and inflation rate by the Chinese statistical data from 1978 to 2013. The results show that inflation has a positive effect on household savings in the long run.

Monetary policy expectation and inflation management: DSGE analysis based on news shocks

WANG Xi;WANG Qian;CHEN Zhongfei

Economic Research Journal,2016,Vol 51,No. 02

【Abstract】 From the perspective of news shocks, this paper distinguishes and studies the effects of both the anticipated and unanticipated monetary policy shocks on China’s inflation in a New Keyesian DSGE model. Furthermore, we analyze the characteristics and mechanism of China’s monetary policy by Sino-US policy effect comparison, and the replacement of parameters and expectation structure. The conclusions are as follows: (1) The impacts of the anticipated shocks are much stronger than the unanticipated ones in China. (2) Compared with the case of the United State, China’s monetary policy has a larger and less persistent effect with a minor over-shooting feature. (3) The above characteristics origin from the incoherency of the monetary policy conducted by the central bank and the short-sighted expectation from the economic agents. The policy implications are derived: (1) To make monetary policy more effective, the central bank should guide the public’s expectations by means of central bank communications. (2) The central bank should try to avoid discretion in order to maintain the consistency of monetary policy. (3) The implementation of monetary policy should keep its deeds with its words. In sum, China’s monetary policy should be more transparent, coherent and credible.

The forgotten aggregate supply: is fiscal expansion inflationary?

GUO Changlin

Economic Research Journal,2016,Vol 51,No. 02

【Abstract】 Generally speaking, fiscal expansion will lead to inflation. This paper reconsiders this issue by introducing productive government expenditure into a dynamic stochastic general equilibrium (DSGE) model, and estimates it by Bayesian methods using the sample from the first quarter of 1998 to the fourth quarter of 2013. The findings are as follows. (1) Productive fiscal policy can influence inflation dynamics through both aggregate demand and aggregate supply channel. Although the former may trigger inflation, the latter will depress it. The relative strength depends on the productivity of the government expenditure. (2) Based on Chinese quarterly data, we find that inflation is not mainly caused by fiscal stimulus in sample period. In addition, these discoveries are robust to different form of utility function, investment adjustment cost function and alternative specifications on labor market. By examining the effects of fiscal news shock, we find that revealing relevant information about future policy in advance is helpful to stabilize the public’s expectation.

Adaptive learning and China’s inflation disequilibrium

FAN Conglai;GAO Jiechao

Economic Research Journal,2016,Vol 51,No. 09

【Abstract】 Based on the background about bounded rationality in public expectations, this paper firstly introduced three kinds of adaptive learning processes into the Hybrid New Keynesian Phillips Curve in order to model the dynamic disequilibrium mechanism of inflation operation. After using real data from the first quarter of 2001 to the third quarter of 2015 to estimate parameters, it selected the most suitable learning model. Simulation analysis shows the following findings. First, inflation operation shows the disequilibrium feature under adaptive learning expectation. Second, reducing the influences of inflation expectation and inflation inertia in inflation formation mechanism can effectively inhibit the potential equilibrium inflation and the influence of inflation inertia is greater than that of inflation expectation. Third, improving the rational degree of public expectation could help decrease the deviation between actual inflation and equilibrium inflation. This paper proves that monetary policy for price stability should be implemented through two ways: (1) decreasing the deviation between actual inflation and equilibrium inflation by increasing the rational degree of public expectation; (2) guiding the economy to converge to low equilibrium inflation. This paper suggested that monetary policy should be combined with institutional improvement to inhibit potential equilibrium inflation. Meanwhile, expectation management should avoid myopic tendency and improve the information disclosure mechanism. In the long run, it also must improve people’s level of economic education and enhance the public’s judgment of the economy.

Venezuela’s hyperinflation and economic woes: causes and implications

HE Liping;MA Wei

International Economic Review,2017,No. 06

【Abstract】 The Venezuelan economy has deteriorated rapidly since 2015 and has been trapped in hyperinflation and economic recession since 2016. Analysts have generally attributed the deteriorating Venezuelan economy to the so-called “Dutch disease” and abnormal trade relations. Our analysis shows that “Dutch disease,” at most, may be accountable for Venezuela’s economic downturn since 2014, when world oil prices began to fall, but it has little relevance to the country’s deep recession and hyperinflation. The study of Venezuela’ bilateral trade relations with China and the US shows that the main culprit of its economic deterioration is its domestic economic problems. The article argues that Venezuela’s current economic problems are rooted in its economic policy making, especially the Venezuelan government’s incessant pursuit of expansionary fiscal spending and blatant foreign exchange controls. The latter has resulted in unstoppable currency devaluation expectations and domestic inflation expectation, both of which have further driven up currency devaluation and inflation surges. In turn, the rising inflation aggravates the economy and public finance in Venezuela. A hard choice facing Venezuela is either to further tighten foreign exchange controls, or deregulate the economy with aids from the international community. There could not be any “third way” that would work.

Impact of changes of Russian ruble exchange rates on Russia’s inflation: an empirical analysis based on VAR model

SUN Guofeng ;WANG Yuan

Russian Central Asian & East European Market,2018,No. 02

【Abstract】 Reviewing the path of Russia’s exchange rate reform since the 1990s, this paper explores dynamic relationships between a group of endogenous variables by establishing the VAR model and adopting the Granger causality test, impulse response analysis and variance decomposition. The result of the analysis indicates that the change in Russia’s domestic price level over the lagged period is the decisive factor behind the current price level. This conclusion has some implications for China. China should steadily boost its exchange rate reform, tighten regulation of capital accounts, and expedite industrial restructuring and upgrading.

International transmission and welfare effects of inflation target shock under the US dollar pricing constraint

FAN Aijun;BIAN Xuezi

The Journal of World Economy,2018,Vol 41,No. 02

【Abstract】 By further improving the NOEM model, we empirically estimate the two-country model under various capital market structures with quarterly data of China and the US. We test the model’s ability of fitting the moments and study the international transmission and welfare effects of inflation target shock in details. This paper reveals that the estimation of the model with noise exchange rate expectations is better than the other methods. Relaxation of the assumption of symmetric structural parameters and introducing tradable goods pricing constraints significantly improve the model’s moment matching effect. Using variance decomposition, we find inflation target shock is a key source of economic fluctuations of China and the US. Further research with IRF analysis shows that adjustment of the inflation target benefits domestic economy but leads to obvious shrinking of trade partners’ output and consumption, which is a typical beggar-thy-neighbor monetary policy. Welfare analysis proves that higher trade openness and bigger deviation of foreign exchange market from the rational expectation result in larger welfare loss of inflation target shock.

Do low interest rate levels necessarily stimulate inflation? An empirical analysis of continuous wavelet transform patterns in time and frequency

XIANG Lijin;XIAO Zumian

Financial Economics Research,2018,Vol 33,No. 02

【Abstract】 Based on monthly interest rate data for the period from January 1998 to December 2016, this study applied the continuous wavelet transform method to empirically analyze the positive and negative effects of changes in interest rates on price levels. The results showed that inflation is the main reason for short-term changes in interest rates. The effectiveness of China’s monetary policy implies that a positive (negative) change in interest rates leads to a negative (positive) change in inflation. However, our empirical results showed that changes in interest rates cause long-term changes in the inflation rate. The supply-side effect of changes in costs triggered by interest rates remains dominant. A positive (negative) change in the interest rate tends to cause a positive (negative) change in inflation. However, maintaining a low interest rate does not facilitate inflation in the long run. Therefore, a monetary policy that aims to use interest rate cuts to reduce corporate financing costs and promote the development of the real economy does not conflict with a monetary policy that aims to maintain stability in price levels.

China’s fiscal and monetary policy uncertainty on inflation expectation: an empirical analysis on policy uncertainty

ZHU Jun ;CAI Tiantian

Public Finance Research,2018,No. 01

【Abstract】 This paper studied the dynamic effect of Chinese fiscal and monetary policy uncertainty on inflation expectation. We set China’s specific policy uncertainty indices using the method of Baker et al. (2016) and the latest structural vector autoregressive model (SVAR) method to identify policy shocks. Then, the impulse-response analysis was conducted in this paper. It is found that firstly, the policy uncertainty index set in this paper is robust, and the index results from different sources are substitutable. Secondly, the impact of fiscal policy uncertainty and monetary policy uncertainty on inflation expectation is similar. The response effect of inflation expectation is nonlinear, namely, a rise in the short run and drop in the long run. Finally, monetary policy uncertainty has a greater impact on inflation expectation, while fiscal policy uncertainty increases the duration of inflation expectation. The response of experts’ inflation expectation to specific policy uncertainty is relatively clear, while the response of the public’s inflation expectation to a specific policy uncertainty is not.

A micro-interpretation of inflation illusion from the perspective of earnings quality

LUO Yonggen;RAO Pingui;YUE Heng

The Journal of World Economy,2018,Vol 41,No. 04

【Abstract】 During inflation periods, investors cannot properly adjust corporate earnings growth, which, in turn, leads to inflation illusions; as a result, there is no possible way of accurately estimating the value of stocks. It is considered that the underlying reason is that inflation itself reduces corporate earnings quality. We find that inflation significantly reduces the corporate earnings quality, and that the main mechanism consists of increasing the company’s procurement costs whilst reducing the readability of its annual reports. Furthermore, these results are clearly more prominent in non-margin financing and securities lending companies, companies with lower proportion of shares held by institutional investors, non-high-tech industries, higher inflation periods, companies with lower matching between revenue and cost, and companies with higher debt ratio, as well as in loss-making companies. The conclusion in this paper provides more direct evidence for the inflation illusion hypothesis.

Price rigidity, heterogeneous expectations and the dynamics of inflation

DENG Yanfei;DONG Feng;XU Yingfeng;FENG Wenwei

Management World,2017,No. 09

【Abstract】 Using the Chinese macro data that have been studied and processed by Chang et al. (2015) and following the method used by Dupor et al.(2010), we estimate the degree of stickiness and analyze the sticky characteristic of the business sector in China. The findings are as follows: (1) Both sticky information and sticky price are present in Chinese data; (2) dual stickiness models can be distinguished from hybrid New Keynesian models; (3) under the dual stickiness model, the firm adjust prices every five quarters and use the latest information to determine prices every 7.7 quarters on average, and under the hybrid models, 72 percent of the firms are forward-looking while 28 percent are backward-looking; and (4) the data prefers the hybrid New Keynesian model over the dual stickiness model although the models’ goodness of fit are almost the same, which imply that we should still use the hybrid New Keynesian model when we study the monetary policy in China.

Study of China’s monetary policy response rules: From a perspective of core inflation

DING Jianping;WEI Lizhu;LU Changrong

Financial Economics Research,2018,Vol 33,No. 01

【Abstract】 Since the subprime mortgage crisis, many central banks have adopted core inflation to replace inflation as their monetary policy objective. Drawing on the new Keynesian open economy model, this study attempts to explore the role of core inflation under the optimal interest rate rule as derived from the first-order condition of the welfare loss function of central banks, with balance of payments surplus incorporated. Using the generalized method of moments (GMM), this study compares and analyzes monetary policy responses pegged to core inflation and inflation. The findings of this study reveal that, compared with inflation, pegging to core inflation can avoid making over-adjustments to interest rates, alleviating welfare loss for the People’s Bank of China and lowering the impact of the United States benchmark interest rate on that of China. In addition, the foreign exchange market intervention coefficient and real exchange rate coefficient have different characteristics in monetary responses with core inflation targeting and inflation targeting. Therefore, the People’s Bank of China needs to construct an official core inflation series appropriate to China’s economic structure to develop relevant monetary policy response rules that will provide reasonable guidance for market expectations and is conducive to stabilizing the financial system in China.

Monetary policy, exchange rate fluctuation and the causes of inflation’s time-varying volatility

CHEN Chuanglian;LONG Xiaoxuan;YAO Shujie

The Journal of World Economy,2018,Vol 41,No. 04

【Abstract】 This paper develops a new Phillips curve with the inclusion of monetary policy and exchange rate, then applies TVP-VAR to investigate the causes of inflation’s time-varying volatility throughout the period spanning from 1992 to 2017, and finally derives a Phillips curve with time-varying parameters via back-stepping. The results show that the central bank’s interest rate policy of inflation targeting is effective. However, due to the relatively weak impact of quantitative monetary policy on the nominal interest rate, quantitative monetary policy only has a short-term effect in regulating inflation. From the time-varying perspective, fiscal expansion would lead to price increases and supply shock-driven inflation (e.g. the periods of 1992–2001 and 2008–2013). However, once the government implements prudent fiscal policies and deals with inflation from the supply side, the market cost then becomes a major driving force for inflation (e.g. the periods of 2002–2007 and 2014–2017). Therefore, inflation shows a significant absorption effect in response to fiscal policy. Furthermore, due to the fracture of the transmission channel from the exchange rate to the interest rate and the producer price index, no imported inflation via the exchange rate can be seen in the recent period.

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