Spillover Effect Of Quantitative Easing Monetary Policy In The United States To China’s Inflation

Quantitative easing monetary policy was first put into practice in Japan in March2001. After the outbreak of the global financial crisis in2008, as the failure oftraditional monetary policy, the Federal Reserve carried out four rounds ofquantitative easing monetary policy in order to promote economic recovery andregain public confidence. The policy flooded the market with a lot of liquidity byoverdrawing government credit. Subsequently many other developed countries alsofollowed the policy. Although quantitative easing monetary policy is becomingincreasingly fierce all over the world, it doesn’t reach the expected significant impact.On the contrary, the policy adds the risk of global liquidity flooded. As the UnitedStates is the only superpower,and dollar is the most important currency of theinternational monetary system, the quantitative easing monetary policy inevitablyleads to the influx of hot money in the emerging countries. As the level of China’sopening to the outside world is deepening, and the economic and trade link to theUnited States is increasingly close, the implementation of this unconventionalmonetary policy is bound to have a far-reaching impact on China’s inflation. Althoughthe exit of the quantitative easing monetary policy has no specific timetable, thegradual withdrawal of the policy is definitely settled. So the impact of quantitativeeasing monetary policy’s exit on China’s inflation is worthy of study. Thatcomprehensive and profound understanding of external risk factors is essential forChina which is in the process of economic transition.Firstly, by analyzing the connotation of the quantitative monetary policy and theMundell-Fleming model, the paper explores the conduction mechanism and channel of the United States quantitative easing monetary policy on China’s inflation byusing vector error correction model, impulse response function and variancedecomposition. While the paper separately analyzes the influence of the quantitativeeasing monetary policy on China’s inflation through trade channel, exchange ratechannel, foreign exchange channel and interest rate channel. Then the paper reachesa conclusion that the quantitative easing monetary policy of the United States is a bigrisk factor to China’s inflation. Finally, aiming at the results of the empirical analysis,the paper presents several related policy recommendations to reduce the negativeeffects of the quantitative easing monetary policy of United States on China. First ofall, the monetary authority of China should strengthen cooperation with othercountries to improve the ability of monetary policy formulation. Secondly, we shouldachieve trade diversification to stimulate domestic consumers’ demand. Then, weshould maintain the stability of RMB exchange rate and speed up theinternationalization of RMB. Finally, we should spare no efforts on research andinvention to enhance the competitiveness of our products in the international market.