Effects Of Trade Balance On China’s Inflation

Since joining the WTO, China has experienced three obvious inflations in2003-2005,2007-2008and2010-2011. Different from those previous inflations after the opening up and reforms, thethree inflations are more related with the international trade. At the same time, since Chinaimplemented the export-oriented policies in1990s, trade balance is a surplus in long-terms. How isit going between the trade balance and China’s inflation? What are the specific impact pathways?What were the differences of each impact pathways in those three inflations? What will ourgovernment response in order to cope with the coming of the next round of inflation? These are ourproblems to be solved.Regarded of those problems, this article discusses the the effects of trade balance on China’sinflation from three different pathways, for instance, the currency supply pathway, costs increasepathway and commodity supply and demand pathway. This paper use the monthly data fromJanuary2002to December2011, and study the impact mechanisms with various kinds ofmeasurement methods, for instance, vector autoregressive model, Johansen cointegration test,Granger causality test, and then use the state-space model to estimate the coefficient of eachvariation. The empirical results confirmed that:(1) Overall, after China joined the WTO, the effectsof trade balance on China’s inflation are established in all those pathways which have been stated.(2)In each specific phases, currency supply pathways was the most obvious in the inflation phasefrom2007to2008; costs rise pathways was the most obvious in the inflation phase from2003to2005; commodity supply and demand pathways was the most obvious in the inflation phase from2003to2005; the combined effect pathway was the most obvious in the inflation phase from2003to2005.