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Money growth and inflation in China: New evidence from a wavelet analysis

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  • Jiang, Chun
  • Chang, Tsangyao
  • Li, Xiao-Lin

Abstract

This paper provides a fresh new insight into the dynamic relationship between money growth and inflation in China by applying a novel wavelet analysis. From a time-domain view, our findings show strong but not homogenous links between money growth and inflation in the mid-1990s and the period since the early 2000s. Especially since the early 2000s, China's monetary policy has achieved much better performance in terms of inflation management compared to previous years. From a frequency-domain view, we find that money growth and inflation are positively related in one-to-one fashion in the medium or long run whereas they deviates from such a positive relation in the short run due to temporary shocks and significant lag effects. We can also conclude for China that the long-run relationship between M0 growth and inflation supports the modern quantity theory of money (QTM), while the medium-run relationship between M1 growth and inflation as well as M2 growth and inflation supports the modern QTM. In general, however, our results fit well with the fact that China has experienced economic transitions and structural adjustments in monetary policy over the past two decades. Based on the above analysis, this paper provides an overall view of monetary policy operations and some beneficial implications for China.

Suggested Citation

  • Jiang, Chun & Chang, Tsangyao & Li, Xiao-Lin, 2015. "Money growth and inflation in China: New evidence from a wavelet analysis," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 249-261.
  • Handle: RePEc:eee:reveco:v:35:y:2015:i:c:p:249-261
    DOI: 10.1016/j.iref.2014.10.005
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    Cited by:

    1. Chi Wei Su & Heng-Guo Zhang & Hsu-Ling Chang & Rui Nian, 2016. "Is exchange rate stability beneficial for stabilizing consumer prices in China?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(6), pages 857-879, September.
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    4. Chi-Wei Su & Jiao-Jiao Fan & Hsu-Ling Chang & Xiao-Lin Li, 2016. "Is there Causal Relationship between Money Supply Growth and Inflation in China? Evidence from Quantity Theory of Money," Review of Development Economics, Wiley Blackwell, vol. 20(3), pages 702-719, August.
    5. Funashima, Yoshito, 2017. "Time-varying leads and lags across frequencies using a continuous wavelet transform approach," Economic Modelling, Elsevier, vol. 60(C), pages 24-28.
    6. Lin, Fu-Lai & Chen, Yu-Fen & Yang, Sheng-Yung, 2016. "Does the value of US dollar matter with the price of oil and gold? A dynamic analysis from time–frequency space," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 59-71.
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    10. Ferrer, Román & Bolós, Vicente J. & Benítez, Rafael, 2016. "Interest rate changes and stock returns: A European multi-country study with wavelets," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 1-12.
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    13. Yang, Lu & Hamori, Shigeyuki, 2015. "Interdependence between the bond markets of CEEC-3 and Germany: A wavelet coherence analysis," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 124-138.

    More about this item

    Keywords

    Money growth; Inflation; Wavelet analysis; Time domain; Frequency domain;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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