The purpose of this book is to conduct a comprehensive, systematic and scientific analysis of the causes and effects of price inflation in mainland China during the period 1978-1993. For this purpose, various conceptual, methodological and statistical problems encountered in the study are first addressed and ways to deal with them elaborated upon, including the identification of five criteria for choosing a good inflation model. It should (1) be highly encompassing but with due consideration given to the principle of simplicity, (2) consist of robust economic relations that are also compatible with relevant economic theories, (3) be able to explain price behavior in the past, (4) be adequate to predict the trends and rates of change of the consumer price index or retail price index in post sample years, and (5) be useful in formulating price stabilization policy. To examine if any proposition(s) or model(s) have met these five criteria, a sequencecy, while the fourth test is qualitative.
The final results of the empirical analysis are four groups of recursive models that appear to meet virtually all the above five criteria. Two of them (one being a levels model and the other a rates model) better explain the past and post-sample behavior of retail price index (RPI) in mainland China. These two models indicate that the direct causes of RPI inflation are the increase in average cost of production (AC or cc), the increase in nominal consumption expenditures by residents and by state- and -collectively-owned units (E), the rise in the proportion of total commodity retail sales transacted at market prices (RFM), and the increase in the product of E and RFM (that is, E. RFM). Since the direct causes of RPI inflation in these two models are more or less the same, their corresponding indirect causes should be similar. The other two groups of recursive models (also one being a levels model and the other a rates model) better explain the past and post-sample behavior of urban consumer price index (CPI) in mainland China. These latter two models indicate that the direct causes of changes in the CPI are the average cost of production (AC) and the ratio of nominal consumption expenditures (E) to total real commodity retail sales (S), that is E/S. Since the direct causes of CPI inflation in these two models are the same, their corresponding in direct causes are also similar. The main difference between the former two recursive models and the latter two stem from the fact that direct causes of the former include the variables RFM and E. RFM while those of the latter do not.
The information available indicates that price inflation has worsened income distribution, living standards of a large proportion of the population, consumption shortage of infrastructure, resource allocation, and the economic growth and the fiscal deficits in post-1978 mainland China. The standard regression analysis is conducted, and sensitivity analysis is applied to empirically evaluate the effects of inflation and several other potential explanatory variables on the rate of economic growth. The results show that the long-run net effect of inflation on economic growth in post-1978 mainland China has been negative. Although the slowdown of economic growth has resulted in the increase of the official unemployment rate in urban China, disguised unemployment in both urban and rural China has been so overwhelming that neither inflation nor disinflation has significantly changed, nor will significantly change, the dismal state of official and covert unemployment in mainland China.
