Abstract

Measuring inflation accurately is a basic premise for central bank to control inflation effectively and maintain long-term price stability.The consumer price index is not a reliable indicator to measure inflation，despite it is the most important inflation index in China currently.When this unreliable inflation indicator is adopted in the implementation of monetary policy，misjudgment of inflation situation is likely to happen，thus the effectiveness of monetary policy will be weakened.Therefore，amending the existing inflation indicator，so that measuring overall inflation level more accurately，is of both great practical significance and certain academic value.

Against the background of rapid advance in economic globalization and the boom in financial markets，asset price fluctuates drastically while consumer price level remains relatively stable，leading to profound change in the inflation formation mechanism.Due to the profound changes in the inflation mechanism，this book pays attention to the overall price stability in a broader sense.Based on the advanced econometric techniques，this book constructs a generalized price index which can reflect the overall price level in Chinese economy and discusses the value of the generalized price index in the implementation of monetary policy.The theoretical and empirical analysis shows that the generalized price index is superior to traditional consumer price index in reflecting the economic cycle variations and measuring the overall price level，thus the new price index could serve as an important reference target in monetary policy operations.

The research of the this book will be carried out from three aspects：the necessity of constructing generalized price index，the construction of generalized price index and the application in the monetary policy operations.Firstly，this book deconstructs the construction process of consumer price index，discusses the deviation of CPI in terms of measuring inflation，and elaborates the shortcomings of traditional monetary policy framework which adopts CPI as the main inflation indicator.Secondly，this book summarizes existing methods of constructing the generalized price index to lay the foundation for this study，and uses the Bayesian Dynamic Factor Model which is developed recently to construct China's generalized price index.Thirdly，this book analyzes the feature of the generalized price index，and discusses the value of generalized price index in the implementation of monetary policy from three aspects：the application of generalized price index in inflation forecasting，the application of generalized price index in the balance of controlling inflation and smoothing business cycle，application of generalized price index in the selection of intermediary targets of monetary policy.

Based on theoretical analysis and empirical test，this book draws several findings and conclusions as follows：Firstly，it is necessary to construct a generalized price index which can reflect the overall price level stability in a broader sense.Secondly，there are significant differences between the generalized price index and the consumer price index.Thirdly，adopting the generalized price index as inflation indicator can improve the result of inflation forecasting.Fourthly，the application of generalized price index in the process of monetary policy operations contributes the central bank to achieve the dynamic balance between controlling inflation and smoothing fluctuations in the business cycle.When the generalized price index is adopted in the implementation of monetary policy，the flattening of Phillips curve which is a long-standing trouble faced by central bank can be resolved.Finally，there is a stable and reliable relationship（relevance）between the generalized price index and the monetary supply.Therefore，as an intermediate target of monetary policy，money supply is still valid when the generalized price index is adopted as the inflation indicator.

On the basis of the analysis conclusion of this book，the author suggests that it is necessary for China's central bank to construct the generalized price index so as to measure inflation more accurately.Besides，under the background of the new normal，to achieve the dynamic balance between stabilizing price and smoothing fluctuations in the business cycle it's necessary to adopt the generalized price index.Finally，in the transition phase of monetary policy framework，the central bank should not discard the monetary supply indicator.

Keywords：Generalized Price Index；Dynamic Factor Index Model；Phillips Curve；Intermediate Target of Monetary Policy