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Demand for Money in Transition: Evidence from China’s Disinflation

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  • Aaron Mehrotra

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Abstract

We examine money demand in the Chinese economy during a period characterized by significant disinflation and outright deflation, coupled with strong output growth. Our study establishes a stable money demand system for broad money M2. Inflation affects the adjustment of the system towards equilibrium, and shocks to broad money are found to lead to higher inflation in the context of an impulse response analysis. No evidence of non-linearity in money demand is found for the disinflationary period. The results provide support for the PBoC’s policy of specifying intermediate targets for money growth. Importantly, our results suggest that movements in the nominal effective exchange rate should be taken into account in a successful implementation of such a policy.

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File URL: http://hdl.handle.net/10.1007/s11294-007-9129-4
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Bibliographic Info

Article provided by Springer in its journal International Advances in Economic Research.

Volume (Year): 14 (2008)
Issue (Month): 1 (February)
Pages: 36-47

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Handle: RePEc:kap:iaecre:v:14:y:2008:i:1:p:36-47

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Web page: http://www.springerlink.com/link.asp?id=112112

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Keywords: Money demand; Disinflation; Deflation; China; E40;

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Citations

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Cited by:
  1. Aaron Mehrotra, 2008. "Demand for Money in Transition: Evidence from China’s Disinflation," International Advances in Economic Research, Springer, vol. 14(1), pages 36-47, February.
  2. Koivu, Tuuli, 2008. "Has the Chinese economy become more sensitive to interest rates? Studying credit demand in China," BOFIT Discussion Papers 1/2008, Bank of Finland, Institute for Economies in Transition.
  3. Delatte, Anne-Laure & Fouquau, Julien & Holz, Carsten A., 2011. "Explaining money demand in China during the transition from a centrally planned to a market-based monetary system," BOFIT Discussion Papers 27/2011, Bank of Finland, Institute for Economies in Transition.
  4. Jarko Fidrmuc, 2009. "Money demand and disinflation in selected CEECs during the accession to the EU," Applied Economics, Taylor & Francis Journals, vol. 41(10), pages 1259-1267.
  5. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.
  6. Mehrotra, Aaron & Kozluk , Tomasz, 2008. "The Impact of Chinese Monetary Policy Shocks on East Asia," BOFIT Discussion Papers 5/2008, Bank of Finland, Institute for Economies in Transition.
  7. Lee, Chien Chiang & Chang, Chun Ping, 2012. "The Demand for Money in China: A Reassessment Using the Bounds Testing Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 74-94, March.

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