A Study On Global Excess Liquidity And Imported Inflation In China

In the beginning of this century, the bursting of the internet bubble caused a huge impact on economy of the United States and the whole world. In order to stimulate the economy, the United States and other developed countries almost universally adopted a loose monetary policy, including increasing money supply and lowering interest rates. More liquidity brought by loose monetary policy has played a significant role in stimulating the global economy but also gradually caused a worldwide problem of excess liquidity. China is no exception. In the context of global excess liquidity, in spite of China’s overall modest rate of inflation, the energy and agricultural prices rose rapidly. Inflation in China showed an obvious structural characteristic. This dissertation attempts to explore the causes of global excess liquidity in the context of global imbalances. In addition, we also try to explain the causes of China’s structural inflation in the context of global excess liquidity.This dissertation reviews the process of global excess liquidity, and holds that the direct cause of global excess liquidity is the super-currency among developed countries in Europe and the United States, especially the United States. We hold that the fundamental reason of global excess liquidity is global economic imbalances, including the unbalanced monetary system, unbalanced economic level and unbalanced economic structure. The global monetary system imbalance and the real economy imbalance would form a vicious cycle, and any one of the developing countries is very difficult to break the cycle. This tells us that it is necessary for the world to establish a new international monetary system to break the monopoly of the US dollar, such as to improve the SDR mechanism.Impulse response analysis, variance decomposition and Granger causality test analysis based on VAR models show that the reasons of international energy and agricultural prices inflation both included US dollar depreciation due to global excess dollar and global economic expanding. The rising of international agricultural prices also included international energy price inflation. In addition, we also found that international energy and agricultural prices are not sensitive to the basic supply and demand situation, which tells us that the fluctuations in the prices of energy and agricultural products were affected largely by speculative factors.And countries around the world should establish adequate energy and food reserves to hedge speculative impact on energy and food prices.In this dissertation, we found that China’s inflation was largely imported. The rising of international energy and agricultural prices was the main reason for the rising of domestic energy and agricultural prices in China. Results also show that domestic economic situation also affected the energy and agricultural prices, and the impact of domestic monetary policy on energy and agricultural prices was minimal. This tells us that if we have to use monetary policy to cope with inflation, a distinction must be made among different types of inflation. And monetary policy pegging on core inflation will be more reasonable than pegging on headline inflation.