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Expectation, Excess Liquidity and Inflation Dynamics in China

Author

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  • Jisheng Yang

    (School of Economics, Huazhong University of Science & Technology, Wuhan 430074, China)

Abstract

By introducing the shocks from individual activities into the Hybrid New Keynesian Phillips curve (HNKPC), we investigate the inflation dynamics and the effect of excess liquidity in China. According to the estimation result, some soundly conclusions can be drawn. Firstly, the empirical results indicate that the HNKPC is consistent with the nature of inflation dynamics in China, which posits the inflation dynamics as the combination of backward looking adaptive expectations and forward looking rational expectations. Moreover, defining excess liquidity by M2, the elasticity of inflation defined by CPI to excess liquidity is approximately unit, which reveals that the quasi-money is the main force behind inflation. The nature of inflation expectation and the effect of excess liquidity all provide the evidences that tight monetary policy is effective to curbing inflation in China.

Suggested Citation

  • Jisheng Yang, 2010. "Expectation, Excess Liquidity and Inflation Dynamics in China," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 5(3), pages 421-429, September.
    • Handle: RePEc:fec:journl:v:5:y:2010:i:3:p:421-429
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-010-0105-1
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    Citations

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    Cited by:

    1. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "An analysis of involuntary excess reserves, monetary policy and risk-taking behaviour of Chinese Banks," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 63-72.
    2. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.

    More about this item

    Keywords

    inflation; Hybrid New-Keynesian Phillips curve; expectation; excess liquidity;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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