Empirical Study On The Formation Mechanism Of Excess Liquidity And Its Effect On Price In China

At present, an important feature of the Chinese economy and even the global economy is the excess liquidity. The nature of excess liquidity is that the money supply is much more than the money demand goods, services or assets require for the transaction. Since 2005, different indicators showed that China appeared the phenomenon of excess liquidity and the trend has continued to rise. The economy has kept sustained and rapid growth in China, meanwhile, commercial bank appeared credit expansion, various types of asset prices continued to rise, the consumer price index has also accelerated the upward trend. Therefore, the phenomenon of excess liquidity attracted people's attention and the academia did lots research on excess liquidity.The essay analyzed the present situation of excess liquidity, forming mechanism, its impact on price in different markets and its countermeasures by adopting empirical study and theory study methods, on the basis of literature review on excess liquidity study. Based on the Keynesian theory of money demand, the essay deduced the measurement method of excess liquidity, analyzed the present situation of China's excess liquidity, and summed up the characteristics of excess liquidity in China. When analyzing the forming mechanism of excess liquidity, the essay deduced the important factors in the forming process of excess liquidity by using of the money supply model, did the empirical study on the basis of the sharp rise of excess liquidity from 2004 to 2008. When analyzing the impact of excess liquidity enlargement on prices in different markets, the essay did the empirical study and verification on the price impact of excess liquidity by using econometrics methods such as correlation coefficient analysis, ADF Test, Granger Causality, Cointegration Test, VEC Model, Impulse-response analysis, Variance decomposition on the basis of analyzing the impact of excess liquidity on the price of subsistence material market, the price of production material market, the price of real estate market, the price of stock market.The essay got the main conclusions as follows: firstly, from 2005 to 2008, except for few months, the coefficient of excess liquidity in the most months is greater than 0, and the overall level of excess liquidity has an upward trend. During this period serious excess liquidity existed in China, which became a prominent contradictions in economic running. Secondly, the results shows that in the base money perspective the rapid growth of foreign exchange reserves, the slow pace of consumption growth, and the decrease of the U.S. benchmark interest rates leaded to the formation of excess liquidity; in the monetary multiplier perspective the change of statutory required reserve rate made no difference to the formation of excess liquidity, but the decline of currency–current deposit ratio, the increase of fixed deposit- current deposit ratio, and the increase of loan had vital impact on the formation of excess liquidity, which is verified by the sample data of relevant variables from Jan, 2004 to Jun, 2008. Thirdly, in the long term the fluctuation of excess liquidity has some impact on retail price index, ex-factory price indices of industrial products, price index of commercial house, Shanghai composite Index, and retail price index and price index of commercial house in the short term through the empirical study on the impact of the fluctuation of excess liquidity on the price system by using the sample data from Jan, 2004 to Dec 2007. Fourthly, the essay put forward some countermeasures that manage excess liquidity as follows: provide an outlet for excess liquidity in the short term, prevent excess liquidity from durative enlarging in the medium term, fundamentally solve the problem of excess liquidity in the long term.