Inflation prediction for China based on the Grey Markov model?

Abstract

In order to solve the inflation forecasting problem with small samples and inherent uncertainty, this paper employs the Grey Markov model for inflation prediction by using the annual data from the year of 2005 to 2013. In contrast, the traditional econometric regression models are invalid for the small sample because the estimator of coefficients lose the BLUE properties under the small sample circumstances. Based on the model, the forecasted values are given for the years of 2014 to 2017. The result indicates that the expected price of the economy will experience slow growth for the next three years, then change to high inflation for the year of 2017. Further, the result implies the increase of the price level and the decrease of the natural level of output through the channel of aggregate supply and aggregate demand. From the view of policy, the government should employ the mix expansion of fiscal policy and monetary policy in order to eliminate the fluctuation in output. Specifically for the year of 2017, the government should pay more attention to the increase of the price level besides improving the output. As a result the policy would change to be more prudent.