Research On International Transmission Of Inflation With Evidence From China And Its Trading Partner

With the development of economic globalization, international trade, investmentand capital flows is expanding. Economic ties between countries become moreclosely. A country’s economic fluctuation will break the geographical restrictions toinfluence another country’s economic development via the economic ties betweentwo countries. Inflation theory established in the closed economic condition is not afull explanation of the inflation problem under the open economic condition,especially after global inflation occurred several times in the last century. Theinternational transmission of inflation has caused wide attention from scholars andgovernments. Relevant theoretical analysis method and empirical method have beenproposed. A large number of researches make the theory of the internationaltransmission of inflation mature and perfect. The empirical method is becomingmore diverse and the international transmission mechanism of inflation andpathways were found and tested in repeated exploration. These research findingsmake the scholars home and abroad have a better grasp of the inflation problemunder the global perspective. The proposed theories and propositions makecontribution to the ma inflation management.The previous study in international transmission of inflation focused in theinternal and external factors which influence a country’s inflation. Empiricalresearch on the external factors is confined in the field of trade. There is lack ofstudy on researching the inflation linkage among the countries. Because of theincreasing economic power, China has become a powerful influence on trade power. There are less studies in inflation linkage between China and other countries.Therefore, we use the empirical model (GVAR model) to study the inflation linkagebetween countries in the world.At the same time, we also used GVAR model toresearch the influence made by external factors on inflation in China and estimatehow big the influence made by inflation from China is in other countries.At first, this paper summarizes the research progress of internationaltransmission of inflation and distinguish international transmission mechanism.Secondly, Secondly, this paper apply the GVAR model and impulse responsefunction in the research on the international transmission and influence of China’s inother countries by using the data from China and its trading partners. The resultshows that Changes in global factors and domestic economic factors could influencenot only this country’s inflation, but also inflation in other countries. China’s CPIcould only affects inflation in developed economies weakly, but could have a relativesignificant influence on developing countries, especially Asian countries..Therefore,when governments plan to deal with inflation, they should consider domestic andforeign factors, which could influence inflation in one country. It is necessary tocooperate with other countries and take measures to prevent economy from inflation.