Research On The Transmission Mechanism Of The U.S. Quantitative Easing Monetary Policy To The Inflation In China

In2007, the subprime crisis broke out in the United States and greatly damagedthe U.S. economy. The conventional monetary policy could no longer save the U.S.economy in crisis due to the Keynes's liquidity trap when interest rate fell close tozero. As a consequence, since November2008, the Federal Reserve System startedto implement quantitative easing monetary policy and until the end of2013, fourrounds of quantitative easing monetary policy had been implemented. With theglobalization of world economy, the U.S. quantitative easing monetary policy couldhelp recover the U.S. economy; however, it has triggered worldwide excessiveliquidity and significantly influenced the economy of other countries. China, as oneof America's most important economic partners, is holding the most U.S. debt.China's economy is closely related to America's economic condition andmacroeconomic policies. The global inflation caused by the U.S. quantitative easingmonetary policy has also transmitted to China through credit channel, exchange ratechannel, interest rate channel and commodity prices channel, etc. Therefore, it isvital to study the transmission mechanism of the U.S. quantitative easing monetarypolicy to the inflation in China, based on which our government could take effectivemeasures to cope with the imported inflation in China in the background of globaleconomic turmoil.First and foremost, this study theoretically analyzes the transmission channel ofthe U.S. quantitative easing monetary policy to the inflation in China. According toreal economic situations in China and America, the transmission mechanism of theU.S. monetary policy is presented from the perspective of interest rate and creditchannel, exchange rate and trade channel as well as international commodity priceschannel. Based on factor analysis, this study selects60macroeconomic data seriesto extract the monetary policy transmission channel factors which are combinedwith the China's inflation series to construct factor augmented vector autoregressive(FAVAR) model. Through impulse response function, the responses of transmissionchannel factors to the impulse of the U.S. monetary policy are analyzed and how theinflation in China responds to transmission channel can also be studied. Furthermore,variance decomposition method is employed to study which is the most significantway of the U.S. monetary policy transmission to the inflation in China. The resultsindicate that the international commodity prices channel could be seen as the mostimportant channel of the U.S. quantitative easing monetary policy to the inflation inChina, and the credit channel and international capital flow channel come second. Furthermore, Johansen cointegration test and the factor augmented vector errorcorrection (FA-VEC) model are used to test whether there exist long-term stablerelationship and short-term dynamic adjustment mechanism between monetarypolicy transmission channel factors and China's inflation series. The results showthat there is stable relationship between different series, illustrating that the U.S.monetary policy has enduring impact on China's macro economy and especially onChina's inflation. According to FA-VEC model, however, there exist complicatedfactors that may influence the transmission of the U.S. quantitative easing monetarypolicy to our economy, so the adjustment coefficient of the U.S. monetary policyseries is small in the short-term volatility. While there exists relatively largeadjustment coefficient between consumer price index (CPI) and producer priceindex (PPI) in China, indicating that PPI could transmit price to CPI from upstreamto downstream in the industrial chain.Based on FAVAR model, the tendency of the inflation in China and the U.S.monetary policy transmission channel factors in the next36periods (namely threeyears) are forecasted. The results of the forecasts show that in the next three years,the CPI will remain steady and may go down after three years, while PPI will peakin2014and then show obvious declining trend. At the same time, the internationalprice channel, credit channel and capital flow channel will still be the maintransmission channels of the U.S. quantitative easing monetary policy to theinflation in China, but there exists time lag in the transmission. In the end,according to the above macroeconomic forecast, recommendations are presented forChina to deal with the imported inflation from the view of both cost-push inflationand demand-pull inflation.