Articleidicec.1999.1607,availableonlineathtp://www.idealibrary.comonIdeAl Monetary Growth and Inflation in China A Reexamination T Mohammad s Hasan School of Financial Studies and Law, Sheffield Hallam University, City Campus Pond Street, Sheffield, S 1WB, United Kingdom Received September 24, 1996, revised June 8, 1999 Hasan, Mohammad S -Monetary Growth and Inflation in China: A Reexamination Using the notion of cointegration theory and its implied vector error correction mod- eling strategy, this paper reexamines the relationship between monetary forces and inflation in mainland China. Contrary to most recent research in this area, these results based on unit root and cointegration tests indicate a reliable long-run relationship between the general price level and the money stock, as well as between inflation and mone wth, Our findings also suggest a bi-directional or feedback relationship between inflation and monetary growth. J. Comp. Econ., December 1999, 27 (4), pp. 669-685 School of Financial Studies and Law, Sheffield Hallam University, City Campus, Pond Street, Sheffield, SI IWB, United Kingdom. 0 1999 Academic Press Journal of Economic Literature Classification Numbers: P24, P52, Oll L INTRODUCTION The nature of the relationship between monetary aggregates and inflation in mainland China has been the subject of ongoing debate among researchers. Chow (1987) contends that the quantity theory of money appears to be a plausible explanation of the inflationary process in China over the period 1952-1983. In contrast, Peebles(1992), while recognizing the institutional differences of the Chinese economy from other highly developed market economies, argues that the quantity theory is no help in understanding the historical association between money and prices in China. The situation became more clouded when Huang (1995)reported that monetary forces explain price movements in China in the The author thanks John Bonin and two anonymous referees for providing useful criticisms and Press All rights of reproduction in any form reserved.Monetary Growth and Inflation in China: A Reexamination1 Mohammad S. Hasan School of Financial Studies and Law, Sheffield Hallam University, City Campus, Pond Street, Sheffield, S1 1WB, United Kingdom E-mail: m.s.hasan@shu.ac.uk Received September 24, 1996; revised June 8, 1999 Hasan, Mohammad S.—Monetary Growth and Inflation in China: A Reexamination Using the notion of cointegration theory and its implied vector error correction mod￾eling strategy, this paper reexamines the relationship between monetary forces and inflation in mainland China. Contrary to most recent research in this area, these results based on unit root and cointegration tests indicate a reliable long-run relationship between the general price level and the money stock, as well as between inflation and monetary growth. Our findings also suggest a bi-directional or feedback relationship between inflation and monetary growth. J. Comp. Econ., December 1999, 27(4), pp. 669–685. School of Financial Studies and Law, Sheffield Hallam University, City Campus, Pond Street, Sheffield, S1 1WB, United Kingdom. © 1999 Academic Press Journal of Economic Literature Classification Numbers: P24, P52, O11. 1. INTRODUCTION The nature of the relationship between monetary aggregates and inflation in mainland China has been the subject of ongoing debate among researchers. Chow (1987) contends that the quantity theory of money appears to be a plausible explanation of the inflationary process in China over the period 1952–1983. In contrast, Peebles (1992), while recognizing the institutional differences of the Chinese economy from other highly developed market economies, argues that the quantity theory is no help in understanding the historical association between money and prices in China. The situation became more clouded when Huang (1995) reported that monetary forces explain price movements in China in the 1 The author thanks John Bonin and two anonymous referees for providing useful criticisms and suggestions. Journal of Comparative Economics 27, 669–685 (1999) Article ID jcec.1999.1607, available online at http://www.idealibrary.com on 669 0147-5967/99 $30.00 Copyright © 1999 by Academic Press All rights of reproduction in any form reserved