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Demand for money in transition: evidence from China's disinflation

Aaron Mehrotra

No 10/2006, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

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.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; Deflation; China JEL Classification: E31, E41

JEL-codes: E31 E41 (search for similar items in EconPapers)
Date: 2006-10-10
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Published in Published in International Advances in Economic Research, vol. 14(1), 2008, pages 36-47

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