BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 10/2006:
Demand for money in transition: Evidence from China's disinflation
Aaron Mehrotra ()
Abstract: We examine money demand in the Chinese economy during a
period characterized by significant disinflation and outright deflation,
coupled with strong output growth. Our study establishes a stable money
demand system for broad money M2. Inflation affects the adjustment of the
system towards equilibrium, and shocks to broad money are found to lead to
higher inflation in the context of an impulse response analysis. No
evidence of non-linearity in money demand is found for the disinflationary
period. The results provide support for the PBoC’s policy of specifying
intermediate targets for money growth. Importantly, our results suggest
that movements in the nominal effective exchange rate should be taken into
account in a successful implementation of such a policy.
Keywords: money demand; disinflation; deflation; China; (follow links to similar papers)
JEL-Codes: E31; E41; (follow links to similar papers)
32 pages, August 18, 2006
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