Unraveling the formation mechanism and characteristics of inflation expectations in China

In the post-pandemic era, managing inflation expectations has become a critical issue in China's macroeconomic governance. This study investigates the formation mechanism and characteristics of inflation expectations in China during the economic transition period, employing a Vector Autoregression (VAR) model and GARCH-family models for empirical analysis. The results indicate that money supply, loan prime rate, actual inflation rate, GDP growth, and foreign exchange reserves significantly influence inflation expectations in the short term. Moreover, inflation expectations exhibit notable phased fluctuations, ARCH effects, and cognitive biases among the public. The study also reveals heterogeneity in expectations across different economic agents. Based on these findings, we propose policy recommendations for enhancing expectation management through improved information transparency and forward-looking policy design. This research provides both theoretical and practical insights for inflation expectation management in the context of Chinese-style modernization.