Abstract:
An analysis of the effects of urban residents and enterprises’ inflation expectations on consumption and investment shows that inflation expectations have effects on general demand. Even worse, considerably unstable inflation expectations cause so prominent fluctuation that the results of policy might be neutralized. Although expectations caused by low inflation have only limited negative effects on economy, the instability of inflation induces correspondent instability of inflation expectations, which in turn leads to violent fluctuation of economy. Therefore, to achieve expected effects of monetary policy, the ratio of inflation must be restricted to a reasonable scale. Particularly a malignant inflation crisis must be avoided with effort. In this connection, the central bank’s operation of monetary policy needs to choose some objective of inflation so that the policy may play an “anchoring” part to inflation expectations.
