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The Price Transmission Effect of Liquidity Shock
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TitleThe Price Transmission Effect of Liquidity Shock  
AuthorLiu Yuansheng, Yang Panpan and Wang Yougui  
OrganizationSchool of Public Finance, Southwestern University of Finance and economics;Institute of World Economics and Politics, Chinese Academy of Social Sciences;School of System Sciences, Beijing Normal University,, 
Key WordsFAVAR; Price Transmission; Liquidity Shock; Monetary Policy 
AbstractThis paper sets out to analyze the effect of liquidity shock to the relative price of different industries based on 110 Chinese economic indicators over the period from 2000 to 2011 using FAVAR model. We choose credit size rather than M2 to measure the liquidity. Credit shock works better in explaining the fluctuations of economic indicators, especially the price indexes. We figure out that liquidity shock exerts higher effect in CPI rather than PPI and moves from lower supply chain to higher. This mechanism can be used to understand the channel of price reverse pass-through from lower supply chain to the higher. The responses of relative price to liquidity shock play an important role in the dynamic adjustment of monetary policy. People’s Bank of China should monitor the price change in different industries within supply chain and exerts effective liquidity management. 
Serial NumberWP618 
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