The Impact Of Foreign Money Supply Shocks To Domestic Inflation

With China’s reform and opening-up to the outside world, as well as the development of economic globalization, China’s inflation is more vulnerable to international factors. This paper studies the foreign currency supply shocks on China’s inflation, this inflation occurred during the global financial crisis.The study of this inflation, will be helpful for our country’s relevant departments correctly recognize domestic economic situation, and take effective measures to maintain the stability of macroscopical economy development.The article elaborated two factions’s representations on inflation which is the Keynes doctrine and monetarism, and elaborated economists from different angles to analysis the causes of inflation. Through the explanation of the theory about the causes of inflation, we know the generation mechanism of the inflation causes international conduction.. Combined with the characteristics of inflation, form the transduction channel of the inflow of foreign capital and the transduction channel of the international trade elaborated the conduction mechanism of foreign currency supply shocks on China’s current inflation. Based on the above analysis, the article used in2005January to2011May monthly data take VAR model--impulse response function and variance decomposition to do three steps’empirical test:the empirical study on the impact of foreign currency supply shocks to domestic CPI, the empirical study on the impact of foreign currency supply shocks to the intermediate variables of the transmission channel, as well as the empirical study on the impact of the intermediate variables of the transmission channel to domestic CPI.Through the empirical analysis, obtained the following conclusions(1) The impact of foreign currency supply shocks to domestic inflation is existenced. And the impact of the three national monetary supply shocks on China’s CPI is not the same, the United States and Japan monetary supply shocks on China’s inflation effect is not obvious in the short-term, long-term the impact showed increasing trend, while the British monetary supply shocks in the medium is obvious, while the late show decreasing trends.(2) The impact of foreign currency supply shocks on China’s inflation is conducted by the capital inflow channel and international trade channel. The empirical results of the foreign capital inflow channel show that, the United States currency supply shocks on the intermediate variable of the capital inflow channel’s explaintion is the biggest, followed by British money supply shock. The empirical results of the international trade channel show that, is still the United States currency supply shocks on the intermediate variable of the the international trade transmission channels’explaintion is the biggest, and followed by the Japanese money supply shock.(3) Considering the empirical results of the impact of the foreign currency supply shocks on the intermediate variables of the conduction channel, and the impact of the intermediate variables of the conduction channel on China’s CPI, the international trade transmission channels is more effective than the inflow of foreign capital channel.Through qualitative and empirical study in the two aspects, based on the two conduction channels proposed the policy recommendations to prevent or alleviate the foreign currency supply shocks on China’s inflation. The article thinks tha this inflation showed the lax of our international capital’s supervision and the defects of our industrial structural. So for the capital inflow channel suggest that by improving our investment strategy, strengthening the supervision of our short term capital flowing, reforming China’s current foreign exchange management system, Reasonably cooperating the monetary policy and fiscal policy to achieve internal and external economic equilibrium and other means to achieve the supervision of the international financial; and for the international trade channels articles suggested by adjusting the structure of our country industry, promoting our country international trade in the pricing power, establishing resource utilization and long-term development strategy, in order to isolate the impact of the prices of imported goods on China’s price. The article thinks that only by strengthening our country own economic strength is the most effectively methods to deal with foreign currency supply shocks on China’s inflation.Finally the paper points out the limitations in the research and the problems which need to further improve and in-depth study.