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Excess Liquidity and Inflation Dynamics in China: 1997–2007
Author(s) -
Zhang Chengsi,
Pang Hong
Publication year - 2008
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2008.00118.x
Subject(s) - market liquidity , economics , monetary economics , liquidity risk , liquidity crisis , boom , inflation (cosmology) , real estate , liquidity trap , accounting liquidity , finance , physics , environmental engineering , theoretical physics , engineering
The surge in international capital inflows and the remarkable excess liquidity in China between 1997 and 2007 are examined in the present paper. It is shown that China's improved position in terms of foreign exchange purchases, ignited by huge foreign capital inflows, has effectively induced excess liquidity in China. More importantly, by developing an econometric model for inflation and excess liquidity, the present study demonstrates that excess liquidity has imposed significant pressure on inflation in China over the past 10 years. This finding suggests that excess liquidity in China has not only contributed to the rise in stock prices and the real estate market boom, but also affected the consumer goods market. The potential transmission mechanism of liquidity‐driven inflation and policy implications of the findings of this study are discussed.