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Money and Inflation in China


Author Info

  • Stefan Gerlach

    (Research Department, Hong Kong Monetary Authority)

  • Janet Kong

    (Research Department, Hong Kong Monetary Authority)


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.

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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0504.

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Length: 23 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:hkg:wpaper:0504

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Cited by:
  1. Mehrotra, Aaron, 2006. "Demand for money in transition: Evidence from China's disinflation," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 10/2006, Bank of Finland, Institute for Economies in Transition.
  2. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, Elsevier, vol. 20(3), pages 205-224, May.
  3. Mehrotra , Aaron & Sánchez-Fung, José R., 2008. "Forecasting Inflation in China," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 2/2008, Bank of Finland, Institute for Economies in Transition.


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