An Empirical Study On Ratcheting Effect Of Hot Money And Inflation In China

In recent years with the growing development of economic globalization, financial globalization&financial freedom present a tendency of accelerating. The liberalization of our country’s financial creates environment for international hot money influxing into China. The RMB exchange rate has appeared unilateral appreciation since2005, U.S. interest rates remains so low, leading the interest rates difference between China and USA tends largerer. In such background, abundant of hot money flows into china’s stock market, real estate market, bonds market and other financial department, enjoy the benefit of China’s constant rapid development of economy. The financial system of our country is not so perfect, the bearing capacity and processing capacity of monetary disturbance both have discrepancy between developed countries. So the negative influences which should not be neglected leaded by hot money are prominent to China.The hot money is also affecting macroeconomics negatively in difference aspects. On the one hand, abundant hot money inflows into china which increases the size of foreign exchange reserve, not only hard to manage such a large scale of foreign exchange reserve, but also form pressure of RMB appreciation. On the other hand, the incoming of hot money makes the quantity of domestic base money increases rapidly, a bad financial situation of excess liquidity is coming forth, the price of many kinds of asserts increase and the inflation tends severe. At the same time, the effectiveness of monetary policy been weakened, and the difficulty of macro-control to national economic will increase. What’s more, in addition to the steady benefit of appreciation of RMB, hot money also obtain benefit in other kinds of speculation, causing real estate price soar sky-high and the price of goods increase, all those intensified the inflation pressures and lead the ratcheting effect of hot money and inflation under a series of mechanisms. To control the inflation in situation of open economy, we cannot ignore the importance of managing hot money. This paper bases on the analyses from the perspective of currency, putting up some measures to pull through existing problems. We should improve the economic structure, and begin on the channels of arbitrage of exchange and interest arbitrage, by constructing a two-way floating rate system, and strengthen supervision of the housing market, stock market, commodity market to breakthrough the ratcheting effect of hot money and inflation, last but not the least, strengthen the co-management of hot money is necessarily.The research of hot money has great practical significance. In this paper, combined theory research with positive analysis in order to analyze the problem comprehensively and objectively on the base of dealing with a good number of accurate dates. This paper consists of six parts. The first part is introduction which mainly elaborates the significance and background of this issue, and introduces foreign and domestic’s present research situation. The second part respectively focus on hot money and inflation and describe various aspects of them in details. The third part analyzes this issue from the perspective of currency, the inflows of hot money will lead the ratcheting effect under a series of mechanisms, aggravate the problem of inflation. Part fourth is the empirical analyses of the ratcheting effect of hot money&inflation, adopting cointegration test systematically explains the opinion of this thesis. Part V puts emphasis upon giving suggestions and putting up some measures to deal with the ratcheting problem. Finally, coming to the conclusion.