Empirical study on the transmission of global liquidity to China´s inflation

Based on the traditional quantity theory of money, this paper empirically studies the transmission of global liquidity to China´s inflation in the framework of unconstrained VAR. Cointegration analysis indicates that global liquidity has a clear role on China´s inflation in the long run. Other conditions controlled, for every 1 percent increase of the global liquidity, China´s inflation will fall down 0.57 percent. And the VECM result shows that global liquidity also has a negative effect on China´s inflation in the short term. Global liquidity may deliver some important information about aggregate demand and inflation in China.