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Money and Inflation in China

Author

Listed:
  • Stefan Gerlach

    (Research Department, Hong Kong Monetary Authority)

  • Janet Kong

    (Research Department, Hong Kong Monetary Authority)

Abstract

Recent debates on monetary condition and inflation pressures on the Mainland call for an analysis on the inflation dynamics and their main determinants. A natural starting point for the econometric analysis of monetary and inflation developments is the notion of monetary equilibrium. This paper presents an estimate of the long-run demand for money in China. The estimated long-run income elasticity is rather stable over time and consistent with that estimated in earlier studies. The difference between the estimated demand for money and the actual money stock provides an estimate of monetary disequilibria. These seem to provide leading information about CPI inflation in the sample period. At the current conjuncture, the measure suggests that monetary conditions have tightened since the macroeconomic adjustment started in early 2004. Additionally, an error-correction model based on the long-run money demand function offers insights into the short-run and long-run inflation dynamics.

Suggested Citation

  • Stefan Gerlach & Janet Kong, 2005. "Money and Inflation in China," Working Papers 0504, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0504
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    File URL: http://www.info.gov.hk/hkma/eng/research/RM04-2005.pdf
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    Citations

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    Cited by:

    1. Anne-Laure Delatte & Julien Fouquau & Carsten Holz, 2014. "Explaining money demand in China during the transition from a centrally planned to a market-based monetary system," Post-Communist Economies, Taylor & Francis Journals, vol. 26(3), pages 376-400, September.
    2. repec:zbw:bofitp:2008_002 is not listed on IDEAS
    3. Aaron Mehrotra, 2008. "Demand for Money in Transition: Evidence from China’s Disinflation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 36-47, February.
    4. Juuso Kaaresvirta & Aaron Mehrotra, 2009. "Business surveys and inflation forecasting in China," Economic Change and Restructuring, Springer, vol. 42(4), pages 263-271, November.
    5. repec:zbw:bofitp:2011_027 is not listed on IDEAS
    6. Aaron Mehrotra, 2008. "Demand for Money in Transition: Evidence from China’s Disinflation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 36-47, February.
    7. Chris Bloor & Chris Hunt & Tim Ng & Hamish Pepper, 2008. "The use of money and credit measures in contemporary monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, March.
    8. Huang, Y-F., 2012. "Forecasting Chinese inflation and output: A Bayesian vector autoregressive approach," MPRA Paper 41933, University Library of Munich, Germany.
    9. Juuso Kaaresvirta & Aaron Mehrotra, 2009. "Business surveys and inflation forecasting in China," Economic Change and Restructuring, Springer, vol. 42(4), pages 263-271, November.
    10. Petreski, Marjan & Jovanovic, Branimir, 2012. "New Approach to Analyzing Monetary Policy in China," MPRA Paper 40497, University Library of Munich, Germany.
    11. repec:zbw:bofitp:2006_010 is not listed on IDEAS
    12. repec:zbw:bofitp:2008_022 is not listed on IDEAS
    13. repec:kap:iaecre:v:14:y:2008:i:1:p:36-47 is not listed on IDEAS
    14. Burdekin, Richard C.K. & Siklos, Pierre L., 2008. "What has driven Chinese monetary policy since 1990? Investigating the People's bank's policy rule," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 847-859, September.
    15. Shen, Chung-Hua & Lin, Kun-Li & Guo, Na, 2016. "Hawk or dove: Switching regression model for the monetary policy reaction function in China," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 94-111.
    16. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, vol. 20(3), pages 205-224, May.
    17. Liu, Li-gang & Zhang, Wenlang, 2010. "A New Keynesian model for analysing monetary policy in Mainland China," Journal of Asian Economics, Elsevier, vol. 21(6), pages 540-551, December.
    18. Delatte, Anne-Laure & Holz, Carsten, 2013. "Understanding Money Demand in the Transition from a Centrally Planned to a Market Economy," CEPR Discussion Papers 9721, C.E.P.R. Discussion Papers.
    19. Anne-Laure Delatte & Julien Fouquau & Carsten Holz, 2014. "Explaining money demand in China during the transition from a centrally planned to a market-based monetary system," Post-Communist Economies, Taylor & Francis Journals, vol. 26(3), pages 376-400, September.
    20. Mehrotra, Aaron & Sánchez-Fung, José R., 2008. "Forecasting inflation in China," BOFIT Discussion Papers 2/2008, Bank of Finland, Institute for Economies in Transition.

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