The Influence of RMB Exchange Rate, Excess Liquidity to Inflation

It is important for China to consider whether it is appropriate to curb inflation with RMB appreciation. In this paper, we use the Vector auto regression model to study the influence of RMB exchange rate and excess liquidity to inflation from 1996 to 2011. The results show that RMB appreciation has some inhibiting effect on inflation but the effect is weak. Excess liquidity has some driving effect on inflation, and the driving effect of excess liquidity is greater than the inhibiting effect of RMB appreciation to inflation. Further analysis shows that the excess liquidity produced in the background of RMB appreciation lead to the appearance of market speculation and hype behavior, thus form the market inflation expectation, and pushes inflation ultimately.