MOHAMMAD S HASAN prereform perio reform economy. In contrast, the empirical work of Blejer et al. (1991)on the demand function in the m documents the existence of a relatively stable relationship between a range of regates, inflation, and real lr v After its inception, the Chinese economy experienced relative price stabilit more than 30 years. Following the economic reform in 1979, price increases remained a substantial and common phenomena almost throughout the 1980s and mid-1990s. Inflationary pressure rose to its first postreform peak of 6%per annum in 1980: in the second half of the 1980s. inflation continued to accelerate and reached double digits with a peak of 18.5% in 1989. Inflationary pressure subsided concurrent with faltering growth for the next three years. But ar inflationary upsurge again hit the economy in 1992 and reached its historical apex of 21.7% in 1995 as fast real growth resumed, e.g., 13.5% in 1994 Contemporaneously, the stock of broad money increased by 268% during the period from 1979 to 1985. Broad money rose by 30% in 1992 and at a similar rate in 1993, narrow money and currency in circulation were growing at a rate of% and 46%, respectively, by the end of the first quarter of 1993( Harrold and Lall 1993). Although reserve requirement, credit ceiling, variable interest rates, and other administrative levers have been introduced to control monetary and credit aggregates in the postreform period, their role and effectiveness were problem atic. The postreform economy has experienced insufficient control over monetary and credit aggregates. The activities of nonbank financial institutions(NBFls) and disintermediation have loosened the link between the credit plan and mon- etary aggregates. Unbridled monetary growth in the postreform period was blamed as an important contributor to this inflationary upsurge The aim of this paper is to delineate both the short-run and long-run monetary dynamics of inflation in the Chinese economy. This approach has significant differences from others both theoretically and methodologically, First, this study adopts the theoretical framework of a conventional monetarist model( Chen 1989, Chow, 1987; Huang, 1995)but extends the analysis by incorporating a more general model of inflation to capture the institutional features of the Chinese economy. Second, the study uses the cointegration ogy with However, the exception applies during the period of the Great Leap Forward(1958-1961)when infiation achieved a peak of 16. 2% Harrold and Lall (1993)have noted that the postreform credit explosion outside the credit plan as induced by diversion of funds from the specialized banks to a variety of fast growing NFBls and into the direct hands of enterprises through the interbank market See, for example, Country Profile: China Mongolia, The Economic Intelligence Unit, 1994-1995, p. 17. The country report also suggests that the government often had to resort to printing noney to cover the budget deficit as selling treasury bonds to state employees through paro deductions became an unpopular practiceprereform period reasonably while they have no predictive content in the pos￾treform economy. In contrast, the empirical work of Blejer et al. (1991) on the money demand function in the postreform period from 1983QI to 1988QIII documents the existence of a relatively stable relationship between a range of monetary aggregates, inflation, and real income. After its inception, the Chinese economy experienced relative price stability for more than 30 years.2 Following the economic reform in 1979, price increases remained a substantial and common phenomena almost throughout the 1980s and mid-1990s. Inflationary pressure rose to its first postreform peak of 6% per annum in 1980; in the second half of the 1980s, inflation continued to accelerate and reached double digits with a peak of 18.5% in 1989. Inflationary pressure subsided concurrent with faltering growth for the next three years. But an inflationary upsurge again hit the economy in 1992 and reached its historical apex of 21.7% in 1995 as fast real growth resumed, e.g., 13.5% in 1994. Contemporaneously, the stock of broad money increased by 268% during the period from 1979 to 1985. Broad money rose by 30% in 1992 and at a similar rate in 1993; narrow money and currency in circulation were growing at a rate of 41% and 46%, respectively, by the end of the first quarter of 1993 (Harrold and Lall, 1993). Although reserve requirement, credit ceiling, variable interest rates, and other administrative levers have been introduced to control monetary and credit aggregates in the postreform period, their role and effectiveness were problem￾atic. The postreform economy has experienced insufficient control over monetary and credit aggregates. The activities of nonbank financial institutions (NBFIs) and disintermediation have loosened the link between the credit plan and mon￾etary aggregates.3 Unbridled monetary growth in the postreform period was blamed as an important contributor to this inflationary upsurge.4 The aim of this paper is to delineate both the short-run and long-run monetary dynamics of inflation in the Chinese economy. This approach has significant differences from others both theoretically and methodologically. First, this study adopts the theoretical framework of a conventional monetarist model (Chen, 1989; Chow, 1987; Huang, 1995) but extends the analysis by incorporating a more general model of inflation to capture the institutional features of the Chinese economy. Second, the study uses the cointegration methodology with an 2 However, the exception applies during the period of the Great Leap Forward (1958–1961) when inflation achieved a peak of 16.2%. 3 Harrold and Lall (1993) have noted that the postreform credit explosion outside the credit plan was induced by diversion of funds from the specialized banks to a variety of fast growing NFBIs and into the direct hands of enterprises through the interbank market. 4 See, for example, Country Profile: China Mongolia, The Economic Intelligence Unit, 1994–1995, p. 17. The country report also suggests that the government often had to resort to printing money to cover the budget deficit as selling treasury bonds to state employees through payroll deductions became an unpopular practice. 670 MOHAMMAD S. HASAN