Demand for Money in Transition: Evidence from China’s Disinflation

Aaron Mehrotra

International Advances in Economic Research, 2008, vol. 14, issue 1, 36-47

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 People’s Bank of China’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. Copyright International Atlantic Economic Society 2008

Keywords: Money demand; Disinflation; Deflation; China; E40 (search for similar items in EconPapers)
Date: 2008
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Working Paper: Demand for money in transition: evidence from China's disinflation (2006)
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DOI: 10.1007/s11294-007-9129-4

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