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Excess Liquidity, Inflation and the Yuan Appreciation: What Can China Learn from Recent History?

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  • Chengsi Zhang

Abstract

This paper analyses the issues of excess liquidity, inflation and the exchange rate appreciation currently evolving in China. In mapping the co‐movement between excess liquidity and inflation and developing a dynamic model, the paper shows that excess liquidity, ignited by dramatic capital inflows, is a significant driver for consumer price inflation in China during the last decade. In addition, the article compares the dynamic paths of inflation and interest rates between China and the United States and reveals marked changes in their differentials over recent years. Associating these findings with the evolving appreciation of the yuan against the dollar, the paper advises a slowdown in the rate of RMB appreciation. Instead of quick appreciation, the paper proposes more flexibility in the RMB exchange rate regime combined with alternative capital control measures to rein‐in excess liquidity and curb ongoing inflation in China.

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  • Chengsi Zhang, 2009. "Excess Liquidity, Inflation and the Yuan Appreciation: What Can China Learn from Recent History?," The World Economy, Wiley Blackwell, vol. 32(7), pages 998-1018, July.
    • Handle: RePEc:bla:worlde:v:32:y:2009:i:7:p:998-1018
    DOI: 10.1111/j.1467-9701.2009.01191.x
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    Cited by:

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    2. Luigi Bonatti & Andrea Fracasso, 2010. "Global Rebalancing and the Future of the Sino-US Codependency," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(s1), pages 70-87.
    3. Zongxin Qian, 2011. "Global Imbalance, Excess Liquidity and Financial Risk in China," Chapters, in: Wim Meeusen (ed.), The Economic Crisis and European Integration, chapter 10, Edward Elgar Publishing.
    4. Huang Yiping & Wang Xun & Hua Xiuping, 2010. "What Determine China’s Inflation?," Macroeconomics Working Papers 22770, East Asian Bureau of Economic Research.
    5. Nguyen, Thai Vu Hong & Pham, Tra Thi Thu & Nguyen, Canh Phuc & Nguyen, Thanh Cong & Nguyen, Binh Thanh, 2020. "Excess liquidity and net interest margins: Evidence from Vietnamese banks," Journal of Economics and Business, Elsevier, vol. 110(C).
    6. Wim Meeusen, 2011. "Introduction and Outline," Chapters, in: Wim Meeusen (ed.), The Economic Crisis and European Integration, chapter 1, Edward Elgar Publishing.
    7. Nilanjan Banik & Khanindra Ch. Das, 2014. "The Location Substitution Effect: Does it Apply for China?," Global Business Review, International Management Institute, vol. 15(1), pages 59-75, March.
    8. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "An analysis of involuntary excess reserves, monetary policy and risk-taking behaviour of Chinese Banks," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 63-72.
    9. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.
    10. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.

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