Empirical Study On The Effect Of China’s Excess Liquidity On Inflation

Excess liquidity and inflation are the most prominent problems of China’smacroeconomic area，and we have to face and resolve these issues. From2003to2007,we have experienced a significant phenomenon of excessive liquidity. However, becauseof the impact of the global financial crisis, there was a shortage of China’s liquidity inlate2008to early2009. With the implementation of the loose monetary policy, theshortage liquidity suddenly becomes excess, and this excess liquidity phenomenoncontinued until the first quarter of2011.Accompanied with this is China’s alternativeinflation and deflation.Started from2003, our country is facing the temperate inflation,moreover, there were two more apparent inflation between2007and2008as well asbetween2010and2011. As of March2011, the inflation rate has reached to5.4%.Inflation is a highly complex and general economic phenomena, and it will give rise tomany adverse effects on the economic development. As for the causes of inflation in thelast two rounds, China’s scholars have done a lot of research, most scholars agree thatthe excess liquidity is the main reason. But what has caused the excess liquidity, andwhether there is significant Granger causality between excess liquidity and inflation ornot. This need to undertake a more comprehensive study on excess liquidity and inflation,and identify the transmission mechanism between them.This article is based on the review of the classical theory of inflation, combined withthe present situation of excess liquidity and inflation in China, and it analyzes the causesof China’s excess liquidity, as well as the previous causes of inflation and responsemeasures, And through empirical analysis, finally proved that China’s inflation is mainlycaused by excess liquidity in the near future. And giving many reasonable politicrecommendations in accordance with the results of empirical research,...