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.