Gregory Chow (Princeton University) Yan Shen (Peking University)
Abstract
After giving a brief monetary history of the Chinese macro-economy, this paper presents an error correction model to explain the inflation rate from 1954 to 2002 by its past change, the change in log (M2/real output) and the deviation in the previous period of log price level from a regression on log(M2/real output). The model passes the Chow test for parameter stability using 1979 as the breakpoint as economic reform started in 1979. A VAR for changes in log price, log M2 and log real output is constructed with the lagged levels of the three variables and their lagged changes as explanatory variables. The coefficient matrix of the lagged levels is found to have rank one, written as ab’ where b’ is the transpose of the cointegrating vector, estimated previously by regressing log price on log(M2/real output) for the single error-correction equation for inflation. The impulse responses of log price and log output to innovations in log M2 are consistent with Milton Friedman’s propositions on the effects of money as summarized by Bernanke (2003). Using the same VAR model and M1 instead of M2, we have found the above impulse responses to be similar for the United States and China.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number
104.
For technical questions regarding this item, or to correct its listing, contact: (David Long).
Related research
Keywords:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)