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Demand for money in transition: Evidence from China's disinflation

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  • Mehrotra, Aaron

    ()
    (BOFIT)

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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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 10/2006.

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Length: 32 pages
Date of creation: 18 Aug 2006
Date of revision:
Handle: RePEc:hhs:bofitp:2006_010

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Keywords: money demand; disinflation; deflation; China;

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References

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Citations

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Cited by:
  1. 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.
  2. Straub, Roland & Thimann, Christian, 2009. "The external and domestic side of macroeconomic adjustment in China," Working Paper Series 1040, European Central Bank.
  3. 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.
  4. Fidrmuc, Jarko, 2006. "Money Demand and Disinflation in Selected CEECs during the Accession to the EU," Discussion Papers in Economics 1232, University of Munich, Department of Economics.
  5. 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.
  6. 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.
  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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