Empirical research on financial factors impacted on the risk of inflation in China

Abstract

In an imperfect market economy, the risk of inflation is one of the most important economic risks. Using state space model and SVAR model, this paper examines the relationship between financial factors and the risk of inflation in China. The results show that the exchange rate, interest rate, money supply and financial assets affected the risk of inflation in China. Among these factors, the exchange rate and money supply are the key factors which have different impacts on CPI, while the interest rate and financial assets are the secondary elements. Furthermore, the sharply increased money supply will inevitably raise the inflationary pressure while the appreciation of RMB can could slack the inflation. Based on the findings, we make some recommendations to the economic policy on the current price control in China.