Evidence on the Effects of Money Growth on Inflation with Regime Switching

18 Pages Posted: 3 Dec 2011  

Jinquan Liu

affiliation not provided to SSRN

Chunyang Pang

affiliation not provided to SSRN

Date Written: November‐December 2011

Abstract

Since the latter half of 2010, a new round of inflation has gradually been manifesting in China. The debate regarding whether excess money supply is responsible for this inflation has attracted scholars to investigate the effects of money growth on inflation. In this paper, we use correlation analysis to confirm the comovement between growth of monetary aggregates and inflation. We explore the asymmetric effects of monetary policy on inflation using the Markov regime‐switching model. The empirical results show that monetary policy can be more effective in curbing inflation in a high inflation state than in boosting the price level in a low inflation state. However, simply tightening the money supply might not be sufficient to suppress the price level. To this end, the Chinese Government should adopt other policies, such as supply stabilization policies, to help suppress the price level. Our study can help policy‐makers to determine the actual economic state and provides some policy implications for the current inflation.

Keywords: comovement, inflation, money growth, regime switching

JEL Classification: C22, E31, E42

Suggested Citation

Liu, Jinquan and Pang, Chunyang, Evidence on the Effects of Money Growth on Inflation with Regime Switching (November‐December 2011). China & World Economy, Vol. 19, Issue 6, pp. 19-36, 2011. Available at SSRN: https://ssrn.com/abstract=1967764 or http://dx.doi.org/10.1111/j.1749-124X.2011.01264.x

Jinquan Liu (Contact Author)

affiliation not provided to SSRN

No Address Available

Chunyang Pang

affiliation not provided to SSRN

No Address Available

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