Abstract: By employing an SVAR model which incorporates such variables as China’s principal macro-economy, financial market, international inflation and US monetary policy into a complete system, this paper conducts an analysis of the impacts of domestic and international inflation on China’s macro-economy. The results show that both international and domestic inflations have important effect on China’s real economy and the financial markets, which will also spur the monetary authority to adopt tight monetary policies. In addition, China’s real economy and financial market have some time-lag in responding to such inflations; the impact of the international factors on China’s economy is becoming greater as time passes by. Therefore, when formulating policies, we should strengthen our responses towards the international inflations; the international inflations should be taken as the basis of policy formulation, if necessary.

Key words: inflation; SVAR model; macro-economy