A New Approach for Predicting and Simulating Inflation Expectations in China - Innovative Management in Information and Production - page 173

The model in this paper is based on Phillips curves; it is necessary to give a
brief introduction about the application and development on Phillips curves. Phelps
( 1967 )and Friedman ( 1968 ) additionally proposed the expected Phillips curve:

e
t

π t = π + γ ( U t − U ∗ )

e , U ∗ denote inflation rate, unemployment rate, inflation expectations
rate, and the natural unemployment rate, respectively. Taylor ( 1980 ) put forward the
staggered contract model which contains rational expectations and assumes nominal
wages viscous:

where π t , U t , π

π t = E t π t + 1 + γ ( y t + y t − 1 )

where E t π t + 1 , y t denote inflation expectations rate and output gap rate.

Calvo ( 1983 ) assumed manufacturers adjust price with a certain probability each
period, and then

y t
Fuhrer and Moore ( 1995 ) found those models cannot reflect inflation persistence,
so considering forward expectations, assuming that negotiation salary is relative
average real contract pay, obtained hybrid Phillips curves from the two periods
contract model:

π t = E t π t + 1 + γ

y t − 1 )
Gali and Gertler ( 1999 ) also put forward a similar model:

π t = 0 . 5 ( π t − 1 + E t π t + 1 )+ γ ( y t +

π t = γ b π t − 1 + γ f E t π t + 1 + γ mc mc t

where it denotes real marginal cost.
Wang and Zhao ( 2006 ) studied the relationship among money growth,interest
rate, and inflation expectations by the model:

logm t = λ logA + λα logy t + λβ logi t +( 1 − λ ) logm t − 1

where m t , y t , i t denote money holding adjustment coefficient, real money growth

rate, real income, and interest rates.
Ya n g ( 2009 ) took three factors: household consumption, manufacturers invest-
ment, and impact of the excess liquidity into Phillips curves:

λ ,

k
i = 1 γ b , l π t − 1 + γ f E t π t + 1 + γ mc mc t + 0 1 DS t + 0 2 BR t + 0 3 EL t

π =

t

where DS BR ,and EL denote household consumption, manufacturers investment,

the impact of and excess liquidity, respectively.
Chengsi Zhang and Joel Clovis ( 2010 ) defined inflation persistence to be
estimated as parameter in univariate regression of the form

,