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Research on the Characteristics and Forecasting of Price Fluctuation in China

Author: ShaoMingZhen
Tutor: ChenLei
School: Dongbei University of Finance
Course: Quantitative Economics
Keywords: price fluctuation Ensemble Empirical Mode Decomposition DDMSmodel duration-dependence character C-NNLDS model exchange rate BP NeuralNetwork-Semi-Parametric model Probit model
CLC: F224
Type: PhD thesis
Year: 2013
Downloads: 14
Quote: 0
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In the market economy, the market plays a fundamental role in achieving the optimal allocation of socal resources through the market mechanism. The price mechanism is the core and the most sensitive and effective adjustment of the market mechanism.Price fluctuation has an important impact on the operation of the entire economic system, price fluctuation is also one of the important macroeconomic indicators. Overall, maintaining price stability is one of the four main objectives of macroeconomic regulation recognized by the Governments. China has gradually completed the transition from a planned economy to a market economy since1978from which China began reform and opening-up policy. At the same time, the price of commodities in various fields gradually were decided by the market, the price mechanism has become the main way to guide the market allocation of resources today. With the speeding up of global economic integration, China’s economy is increasingly influenced by external factors; the unique characteristics of price fluctuation in China are formed by the complex domestic and international economic environment. We should summarize the characteristics and grasp the inherent law from the historical volatility of the price cycle, only so we can realize the new characteristics and forecast the future trend of price fluctuation.Through studying on a mass of literatures on the price fluctuation home and abroad, collecting materials and data, this paper research on the characteristics and forecast of price fluctuation by frontier theories and empirical methods of quantitative economics and other related disciplines, at last related policy suggestions are put forward. The main works are as follows:Firstly, Frice fluctuation data (1983.1-2012.8) in china are decompositioned by EEMD (Ensemble Empirical Mode Decomposition) method. After analyzing and summarizing the cycle characteristics of the decomposition of various frequency cycles of price fluctuation, this paper introduces the price fluctuation characteristics of China in different time since1978. The different frenquency cycles decomposed by EEMD have plentiful contents of economics:the high-frequency components reflect the short-term supply-demand and irregular factors that affect price fluctuation; in the middle-frequency components of Price Fluctuation in China have a period of about1year, indicating that the seasonal factors influence price fluctuation in China; the low-frequency components reflect the impulse to price fluctuation caused by inflation. The trend of decomposition show that the general price level in China has the characteristics of price rigidity and asymmetry when price rising and falling. From the low-frequency cycle in price fluctuationand decomposed by EEMD and the CPI cycles, the phase characteristics of Price Fluctuation in China are introduced in accordance with the time period analyzed and summarized since1978.Secondly, in this paper, we study the duration dependence characteristic of price fluctuation in China based on DDMS(Duration Dependence Markov-Switching) model and Gibbs sampling. Duration dependence characteristic is one of important characteristics of business cycles, but there is plent of literature on inflation persistence,few on duration dependence characteristic of inflation rate in China. In this paper the smoothed probabilities of high(low) regime to low(high) regime inflation based on the DDMS model are estimated, and the critical points and the time ranges of each regime zone are identefied through1/2criteria,and the turning points from which high inflation zones to low inflation are in general ahead of downward turning points of the usual CPI cycle,so it is helpful and valuable to forecast downward turnpoints of the CPI cycle. It is also found that inflation rates in the low inflation lever regime have a significantly positive duration dependence characteristic from the results of model estimation, the probability of the regim into other regim significantly increased, while the inflation rates in the high inflation lever regim has positive duration dependence characteristic too,but it is less obvious. The results of the study have important significance for monitoring and early warning of inflation on the price fluctuation and an important reference for making monetary policy in China.Thirdly, based on the nonlinear dynamic system model, nonlinear relationship between price fluctuation and exchange rate fluctuation of China are analysed on evidence and experience. Nonlinear dynamic system model are evolved from generalized Lotka-Volterra model, widely used in math and ecology. In recent years it is used in the economic field and obtain meaningful results.In the paper, a CPI-NEERI Nonlinear Dynamical System model (C-NNLDS) is constructed and estimated.Study show the relationship characteristics between price fluctuation and exchange rate fluctuation is mutual influence of nonlinear dynamic mechanism, obviously the rise in the exchange rate is effective in anti-inflation from the model, but this effect is more obvious in the high inflation rate, and China’s rising prices generally don’t form a decline in the exchange rate (ie, the devaluation of the domestic currency). It is easy to form deteriorations(prices rise constantly, domestic currency depreciate constantly) when high inflation and low exchange rate,which government should try to avoid.After nonlinear relationship model being estimated,with mathematical methods the stability of the system model, the phase diagram and the impulse response are analysised, which accurately portray the price fluctuation and exchange rate fluctuation dynamic traces toward mutual influence. In this paper inherent relationship characteristics between price fluctuation and exchange rate fluctuation of china are recognized through the model, it have very important reference value and strong practical significance for the future trend forecast of the CPI and the exchange rate,for the risk control of economy system.Fourthly, this paper summarizes and studies on the forecasting of China’s CPI. In this paper, the BP Neural Network-Semi-Parametric model is constructed on the basis of summing up the current research progress on forecasting of CPI.The results of study show that the model can combin the nonlinear BP neural network and non-parametric to improve fitting and forecasting accuracy. In addition, this paper also studies on the confirming and forecasting of CPI trend turnpoint through the establishment of Probit model based on the factor indicators influnecing the price fluctuation. In practical applications,the two methods complement each other,which showing high forecasting accuracy of China’s CPI future trend and value.When being concerned about the price change, we often lost their best period of dealing with it (Jing Lian-Wu,2003).So we should deepen the understanding and analysis of inherent laws and characteristics of the price fluctuation, strengthen efforts to forecast price trend, as soon as possible know the future price trend to make macro-control policies good predictability, flexibility and nichetargeting, and take preventive measures to avoid high inflation and continuous deflation to make the unfavorable factors in the market economy nipped in the bud. This paper studies on price fluctuation characteristics and forecasting from multiple perspectives and with multiple methods,which is meaningful for improving the people’s living standards, maintaining social stability, and analysising of macroeconomic.It have important theoretical and practical significance to form the right monetary, fiscal and other macroeconomic policies.

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