18 Pages Posted: 3 Dec 2011
Date Written: November‐December 2011
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: 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
This is a Wiley-Blackwell Publishing paper. Wiley-Blackwell Publishing charges $38.00 .
File name: j-124X.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.