Average wage, money supply and inflation? empirical analysis based on the grey incidence's degree and the state space model

Abstract

With the help of grey incidence's degree, this paper identifies that the factors of wage and money supply both have an important impact on inflation rate. Then the paper estimates the time-varying elasticity of wage on inflation and the time-varying elasticity of M2 on inflation by using the state space model. The estimation indicates that after the year of 2000, the effect of wage and M2 on inflation is stable gradually, which is in contrast to the effect before the year of 2000. And the factor of money supply is a better explanation of inflation than the factor of wage.