Chinese liquidity increases and the U.S. economy

Abstract

China has been a major contributor to increased global liquidity over the past twenty years, with increases in liquidity being associated with increases in the price of most assets including commodity prices. This paper investigates the influence of liquidity shocks in China on the U.S. economy. The influence on the U.S. is through China's influence on demand for imports, particularly that of commodities. In all models a positive innovation in China's liquidity is associated with: 1) a positive and statistically significant effect on oil and commodity prices that builds up rapidly over three months and then persists for twenty months; 2) a positive and statistically significant effect on U.S. CPI inflation that builds up over about six months or so and then persists; and 3) a statistically significant depreciation of the real trade-weighted U.S. currency after about two or three months that achieves maximum absolute value after five to eight months and that then persists.