After The Subprime Crisis China Imported Transmission Mechanism Analysis Of A New Round Of Inflation

In2007, as the U.S. subprime mortgage crisis burst into global financial crisis, theworld is facing a tough economic situation with violently increase of bulk stock pricesand high volatility of capital market. Emerging markets represented by China havebeen leading the global economic recovery, but have also been suffering frominflation. The inflation in China from2007to2011has presented some new features.With the global economic crisis as its background and accompanied by risinginternational bulk stock prices and large-scale capital flows, the inflation rate in Chinais driven by increasing prices of primary products. Structural inflation has emergedand is developing into an overall inflation.How has the global economic crisis affected the growth of inflation in China? Whatare imported inflation factors and transmission into domestic inflationary pressures?The keys to above questions are required to be explored.First, inflation theories are introduced, from the history of which can be concludedthat compromise of international structural inflation theory and monetarism will bethe trend of the inflation theory development in an open economy. In addition,international transmission mechanisms of imported inflation derived from abovetheories are summarized, which are the international transmission of the import pricesand sectoral demand, money supply from international imbalance of payments, andexcess liquidity.Starting from the proposition of monetary theory and combined with the analysis ofthe structuralism, a Simple Dynamic Compromise Theoretical Model (SDCT) is builtwith increase of foreign exchange reserve, prices of primary commodities andconsumer goods as its endogenous variables. The model deduces dynamic path of thatimported money supply shocks in an open economy will drive a domestic structuralinflation and a further development to overall inflation.Next, based on the particular background of the global economic crisis, characteristicsof inflation in China from2007to2011are analyzed compared with the drivingforces of four typical periods of inflation as from China’s reform and opening up.Imported causes and transmission mechanism of the current round of inflation areanalyzed in detail from four aspects. Furthermore, a vector autoregression model(VAR model) is used to test the inflation pass-through in SDCT Model. The Grangercausality test and impulse responses indicate that monetary shock of the inflation in China from2007-2011is from the increase of foreign exchange reserve rather thandomestic credit. Meanwhile, transmission of inflation from primary commodities toconsumer goods is prominent. Domestic causes of inflation will relay importedinflationary pressures to lead to the increase of CPI. Policies for inflation control areproposed in the end.