Money, Price Level and Output in the Chinese Macro Economy

Gregory Chow and Yan Shen
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Gregory Chow: Princeton University
Yan Shen: Peking University

No 104, Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

Abstract: After giving a brief monetary history of the Chinese macro-economy, this paper presents an error correction model to explain the inflation rate from 1954 to 2002 by its past change, the change in log (M2/real output) and the deviation in the previous period of log price level from a regression on log(M2/real output). The model passes the Chow test for parameter stability using 1979 as the breakpoint as economic reform started in 1979. A VAR for changes in log price, log M2 and log real output is constructed with the lagged levels of the three variables and their lagged changes as explanatory variables. The coefficient matrix of the lagged levels is found to have rank one, written as ab? where b? is the transpose of the cointegrating vector, estimated previously by regressing log price on log(M2/real output) for the single error-correction equation for inflation. The impulse responses of log price and log output to innovations in log M2 are consistent with Milton Friedman's propositions on the effects of money as summarized by Bernanke (2003). Using the same VAR model and M1 instead of M2, we have found the above impulse responses to be similar for the United States and China.

Keywords: China; inflation; monetary policy (search for similar items in EconPapers)
JEL-codes: E23 E31 E51 E52 O11 O23 P24 (search for similar items in EconPapers)
Date: 2004-05
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:pri:cepsud:98

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