What Is the Relationship Between the Business Cycle and Inflation?

The relationship between growth and volatility in the economic cycle is more appropriately described as the Phillips curve of "output-price". This Phillips curve replaced the unemployment rate in the original Phillips curve with economic growth rate, and this substitution was achieved through the "Oken Law".

Business cycle fluctuations

Okun's law (Oakon, 1962) is that for every one percentage point reduction in real unemployment rate relative to natural unemployment rate, the actual output level will exceed the potential production level and increase by two percentage points. This will complete the substitution of employment and growth. The relationship between economic growth and inflation is constructed. The theory assumes "the deviation of the actual growth rate from the potential economic growth", and this deviation manifests itself in the gap between total social supply and rising price pressure in a certain period of time. The potential growth rate is also calculated, and the relationship between growth and inflation is simulated in this way.

The so-called potential economic growth rate refers to the highest sustainable level that a country can achieve within a certain stage of economic development, that is, under the conditions of established technology and resources, without the need for full employment and accelerated inflation. Economic growth rate. In a typical business cycle fluctuation, during the rising period of economic fluctuations, as demand expands, the actual economic growth rate deviates from the potential economic growth rate, prices rise, and fall is the same principle.

Regarding the potential economic growth rate, there is also controversy in the international economic community. For example, at the White House New Economy Conference on April 5, 2000, there were three different opinions on whether the U.S. economy had a speed limit in the second half of the 1990s (Whitehouse, 2000): The first opinion is that the economy can continue to grow at a high speed for a long period of time without any speed limit. Professor Galbraith of the University of Texas at the United States proposed that the limit of the rate of economic growth as traditional economic theory does not actually exist. He said: "If there is an upper limit of growth, or a lower limit of unemployment, or a limit of expansion, then the reality is that no one knows where they are." He advocated not to be bound by any growth limit, but to actively promote economic growth . The second opinion is that the speed limit of economic growth exists, but it can be increased in different periods. Professor Nordhaus of Yale University in the United States proposed that, in view of the actual economic growth of the United States in the late 1990s, the overall long-term economic growth rate limit has been raised. "We don't know exactly what this speed limit will be or how long it will last, but it is clear that it is higher than we originally thought." A third opinion states that in the context of business cycle fluctuations, the real economy The growth rate is sometimes higher and sometimes lower than the potential growth rate; and in terms of long-term trends, the potential economic growth rate will not change during a certain stage of economic development. Mr. Altman of Evercore Partners of the United States proposed that the economic growth of the United States in the past three years has exceeded the potential growth rate. In the past 40 years, such fluctuations have also been experienced, but the long-term trend line of productivity has not changed. We do not yet know whether the higher production growth rate in the United States will be sustainable.

Now, the longest period of economic expansion in American history, the 10-year expansion period of the 1990s, has ended. This shows that the speed limit of economic growth exists. However, for a medium-to-long term, for example, about 5-10 years, under different circumstances, the level of economic growth in the next 5-10 years can be lower or higher than the previous 5-10 years.

Economists generally agree that accurately determining potential economic growth is a difficult problem. In particular, China is now in a transition period of economic system and economic development, and this difficulty is even more prominent. Nevertheless, there are still many estimates of China's potential growth rate.

There are different methods for measuring potential growth rates. One is the HP filtering method, that is, the HP filtering method is used to obtain the trend growth of GDP, and this trend growth rate is the potential growth rate; the second is the production function method, which uses the total production function to estimate the potential growth rate; Three are estimates of potential growth rates based on the Phillips equation.

We use the Phillips curve, which reflects the deviation of the inflation rate from the potential level of real income. Figure 6 is the trend of inflation and GDP from 1978 to 2004. It can be seen that the changes between the two have shown some consistency.

According to the price adjustment equation, we can establish the relationship between the inflation rate and the GDP growth rate. In the following, we will use statistical data to perform quantitative analysis on the two. To avoid false regression, we first perform unit root tests on both CPI and GDP, both of which are stationary variables, so we can use OLS for regression. The regression results can be obtained from the regression equation:

CPI = 1.006 * CPI (-1)-0.412 * CPI (-2) + 0.966 * GDP--6.558

Among them, the t statistic is very significant, the DW value is 2.036, the R2 is 70%, and the adjusted R2 is 67%. The measurement result is satisfactory.

Economic implications of the regression equation:

1) CPI is affected by itself. A lag of one period (that is, the previous period) changes the CPI by one unit, which causes the current CPI to change by one unit in the same direction, which is in line with the adaptation period expectation hypothesis. At the same time, a lag of two periods of CPI changes of one unit causes the current CPI to reverse by 0.41 unit. Taken together, the CPI change in the past was 1 unit, which caused the current CPI change in the same direction by nearly 0.6 units.

2) CPI is affected by GDP growth rate. The GDP growth rate changed by 1 unit, which caused the current CPI to change by 0.97 units. This precisely reflects the consistency of CPI changes with GDP changes. Because of this, we can use the CPI to measure whether the economy is overheating, that is, whether GDP is growing too fast.

According to this regression equation, we can calculate the GDP growth rate at different levels of steady-state inflation (the so-called steady state means that the growth rate remains the same. The steady-state inflation rate, that is, no accelerated inflation). According to experience, a reasonable level of inflation that can be tolerated is 3% -5%. Therefore, the GDP growth rate is between 8.1% -8.9%. And this interval can be understood as the interval of potential GDP growth rate. If the growth rate exceeds 9.5%, it is clear that the inflation rate will exceed 6%. GDP growth at a rate of zero was 6.8%.

Based on the previous analysis, the potential growth rate range obtained by the HP filtering method is 8% -10%, and the potential growth rate obtained by the production function method (Lin Yifu et al.) Is 8.56%. The potential growth rate obtained by using the Phillips curve equation is The growth rate ranges from 8.1% to 8.9%. Because the HP filtering method has a lot to do with the nature of the data, we can only derive the potential growth rate in the past, and we cannot draw an accurate judgment on the future based on this. In the future, assuming that the production function is constant, or the Phillips curve equation is constant, the potential growth rate will be between 8.5% -9%.

We further break down the contributions of growth and volatility and analyze the contributing factors of growth and volatility. After the reform and opening up, the contribution of China's economic growth has a phased characteristic. We can look at the contribution rate calculated based on variable prices in a five-year plan (see Table 6). We can also see great development in terms of growth, consumption rate, and investment ratio. Contour, from 1981 to 1990, the average economic growth rate was 9.74%, the consumption rates of 68.89% and 57.86% during the Sixth and Seventh Five-Year Plan period. Consumption was the absolute driving force. The investment rates were 34% and 31%. Leading economic growth; in the two five-year plans from 1991 to 2000, the investment rate rose rapidly during the Eighth Five-Year Plan period, but it was still consumption-led, but overheated investment in 1993 caused large fluctuations. Investment and exports have exceeded consumption, and foreign investment and foreign dependence have increased significantly. In order to withstand the 1997 Asian financial crisis, the country s active fiscal policy has continued to increase the investment ratio, and economic growth has begun to decline; the investment rate exceeded the consumption rate during the 15th period. Has become the main factor leading economic growth, and economic growth has begun to pick up. Since 2002, growth has remained at a high level of more than 9%.

As the Bureau of Statistics did not publish the statistics of constant prices, we used Albert Keidel (2001) to calculate China s GDP and contribution by expenditure method from 1979 to 2000 calculated at 1990 constant prices in China, in line with us and the above conclusions. It is basically consistent, and different years can be referenced and corrected for each other. Throughout the 1980s, the contribution of consumption to GDP was the largest. During this period, many years of negative net exports have been plagued by deficits. Since the 1990s, the growth of net exports has driven the import and export of major years, which is very obvious, especially in the years of slow economic growth. .

We further analyze in detail the growth drivers and adjustment factors in each stage of development. Economic growth in the 1980s began with rural reforms. From 1979 to 1985, rural residents' consumption dominated the economic growth. Only 1985 investment exceeded consumption, which was also related to the excessive investment in rural housing. Urban reforms in the late 1980s unleashed the enthusiasm of urban residents, and snap-ups in 1988 caused prices to rise too quickly. Looking at the contribution at constant prices, the beginning of the economic adjustment in 1989 was also caused by the excessive decline in rural household consumption. It can be seen that the most important growth contribution and fluctuation factors of the 1980s came from consumption, especially rural household consumption. The rural reform began with the return of Comrade Deng Xiaoping in 1975. After undergoing the "Four Gangs" incident in 1976, it took a big step forward. It was adjusted until 1989 and adjusted to 1990. After 16 years of development, it basically belongs to Kuznets' development cycle.

The so-called Kuznets cycle refers to a cycle of 15 to 20 years or more (Lewis 1986), also known as the construction cycle, which is typically reflected in the era of the Great American Immigrants. The main signs are two factors. The interaction promotes development, one is the purchase and construction of residents' property, and the other is the transfer of population. The early and mid-1980s mainly focused on agricultural development brought about by the rural reforms. The living standards of residents rose rapidly. The consumption of urban and rural residents entered a "quantitative expansion." Rural housing was the most important asset accumulation during this period. Employment changes, the process of "leave the soil and leave the countryside", township and village enterprises develop rapidly, urban residents have entered the process of popularization of household appliances, urban and rural residents have entered the "pursuit of consumer quality" stage led by durable consumer goods, and household appliances in household assets have accumulated accelerate.

By the 1990s, China's growth model had undergone major changes. The first was that the exchange rate reform in 1994 created export demand, the surge in foreign investment, the rapid development of manufacturing, and the industrial upgrading; the second was the start of the urbanization process, in 1992 The deregulation of land elements and the release of prices have started urbanization, especially since 1997. The launch of housing consumer credit has further promoted the development of urbanization. Two major needs have stimulated the transfer of rural labor, and the urbanization rate has increased.

The last five years of the new century are the period of accelerated urbanization, and investment has played a leading role in economic growth. What is worth analyzing here is that because investment includes personal investment in residential housing (residential housing consumer credit has grown rapidly), To a certain extent, the investment ratio has been increased, and the high investment includes changes in the composition caused by residential consumption. Driven by urbanized residential consumption, the growth driven by high investment is still relatively stable, but it is also important to realize that the cycle of residential investment has the characteristics of strong fluctuations.

Since the urban construction cycle that began in 1992, the accumulation of real estate for residents has gradually accelerated, and the rural population has also entered the pace of large-scale transfer to cities. The high savings of residents determine the investment scale. After 1998, stimulated by active fiscal and consumer credit, the real urbanization construction cycle has entered an accelerated period, and the new century is even more manifest. During this period, investment will dominate China's growth. One cycle should continue beyond 2010. As the proportion of the urban population exceeds that of the rural population and major changes in the age structure of the population, it will cause a large cyclical adjustment. During this period, the economy will maintain rapid and steady growth.

Since the reform and opening up, the Chinese economy has gone through four cycles of prosperity and is currently in the fifth cycle. Compared with the previous cycles, the characteristics and causes of the fifth boom cycle have changed.

Looking at the annual data, the expansion and contraction of the Chinese economy since 1978 has shown an acceleration and slowdown of economic growth, and there has never been a negative growth phenomenon, indicating that China's economic cycle since the reform and opening up is typical of modern economic characteristics. Growth cycle pattern.

From the end of 1978 to 1991, the Chinese economy experienced three cycles of prosperity. See the table above. The average length of the cycle is 50 months, the average expansion period is 21 months, and the average contraction period is 29 months. Among the three economic cycle fluctuations, the economic cycle mainly manifests as the interaction process of the inherent mechanism of the economy and policy intervention. The government's regulation of the economy is mainly based on direct regulation, and more administrative measures are adopted. Judging from the state of economic operation at that time, China's economy as a whole was still in short supply. Therefore, the cyclical shortage of "bottleneck" industries and the expansion and contraction of capital investment are the main reasons for the cyclical fluctuations of the Chinese economy.

From the middle of 1991 to the end of 1998, the Chinese economy experienced the fourth boom cycle. See the table above. The cycle length is 88 months. Because the fourth boom cycle occurred during the transition period of the Chinese economy, it exhibited some unique characteristics: the cycle of the cycle was significantly extended. The expansion period of this cycle was 40 months, which was much longer than any of the first three expansion periods The contraction period is 48 months, making the fourth cycle the longest boom cycle since the transition.

The reasons that lead to the characteristics of the fourth economic cycle are different from those in the past. In summary, there are important changes in the following aspects.

1. The Chinese economy is no longer a shortage economy. After the large-scale tilted investment in basic industries and infrastructure in the Chinese economy in the late 1980s and 1990s, the "bottleneck" constraint was significantly eased. The buyer's market pattern has basically been formed, and supply in all aspects has become relatively loose.

2. The degree of marketization has increased significantly. China is not yet a complete market economy, and some effective practices under the conditions of a market economy are not yet effective. In view of the special situation of China's economy at this stage, it is still necessary to adopt some practices suitable for China's national conditions.

3. Macro-control has matured. The Chinese government's economic regulation and control method uses various modern methods to strengthen the follow-up, monitoring, and analysis of the state of economic operation. In terms of methods, it has changed from direct to dominant indirect methods in the past, The main administrative measures have been changed to economic and legal ones. In effect, economic relations have been gradually smoothed out, market behavior has been gradually standardized, and economic operations have stabilized.

Time (year-month) Gufenggu expansion period contraction period length (months)

First cycle 78.180.984.3224264

Second cycle 84.385.286.2111223

Third cycle 86.288.991.6313364

Average 212950

Fourth cycle 91.694.1098.10404888

Fifth cycle 98.10