Excess Liquidity and Inflation in China: 2001-2010

Abstract

Since the Chinese government administrated the Reform and Opening-up policy designed toward stimulating China's economy in 1979, China stepped into a period of rapid development. Accelerated growth of the trade surplus and foreign capital inflows led to the creation of excess liquidity, which raised inflationary pressures in the economy. In addition to other factors, the persistence of Chinese inflation may be largely attributable to excess liquidity. This hypothesis is examined with the ‘price gap measure’ in a regression model that includes the Engle-Granger test for conintegration. Estimation is based on available quarterly data for the period from 2001 to 2010.