Effect of Money Supply on Real Output and Price in China

Chih‐Hsiang Chang, Kam C. Chan and Hung‐Gay Fung

China & World Economy, 2009, vol. 17, issue 2, 35-44

Abstract: Over the past 30 years, China has achieved remarkable long‐term economic growth. Using quarterly data, we study the effects of money supply on real output and inflation in China between 1993 and 2008. To this end, we use money supply shocks after filtering out the expected component of the money supply. Our findings provide evidence supporting the asymmetric effect of positive and negative money supply shocks on real output and inflation in China. That is, real GDP growth in China responds to negative money supply shocks but not positive money supply shocks. In addition, inflation responds to positive money supply shocks but not negative money supply shocks. We conclude that the People's Bank of China's policy of steady monetary growth appears to be appropriate. Our study offers important policy implications for China.

Date: 2009
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