What Determine China's Inflation?*

Huang Yiping
China Center for Economic Research, Peking University
(yhuang@ccer.pku.edu.cn)

Wang Xun
China Center for Economic Research, Peking University

Hua Xiuping
Research Department, China Finance 40 Forum

[Abstract] We examine determinants of inflation in China. Analyses of both year-on-year and month-on-month growth data confirm excess liquidity, output gap, housing prices and stock prices positively affecting inflation. Impulse response analyses indicate that most effects occur during the initial five months and disappear after 10 months. Effects of real interest rates and exchange rates on inflation are relatively weak. Our results suggest that output gap is as important as excess liquidity in explaining inflation trajectory. The central bank should closely monitor asset prices given their spillovers to inflation. Currently liquidity measures are still central for controlling inflation, but further liberalization of interest rates and exchange rates are critical.

Key words: China, inflation, excess liquidity, output gap and asset prices

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* The authors benefited from closed-door discussions of this subject organized by China Finance 40 Forum and appreciated insights by the participants, especially Li Fuan, Zhang Jianhua, Xie Ping, Zhong Wei, Guan Tao and Zhang Bin, among others. Tao Kunyu provided comments on the draft.

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