Download Monetary Policy and Inflation: a case study

MONETARY POLICY AND
INFLATION: A CASE STUDY
BY HAO JIN
DISCLAIMER: OPINIONS EXPRESSED IN THIS PRESENTATION ARE SOLELY MY OWN AND DO NOT EXPRESS THE VIEWS
OR OPINIONS OF THE INSTITUTIONS THAT I AM AFFILIATED WITH.
FACTS ABOUT RECENT CHINESE MONETARY POLICY
• In 2012, China’s GDP accounts for 8% of total world GDP.
• China’s money stock, measured by M2, accounts for 27% of total world money
stock.
• During 2012, Chinese M2 grows by $2.1 trillion, roughly accounts for half of
the total world money growth.
INTERNATIONAL COMPARISON OF M2/GDP
09-13 average M2/GDP(%)
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
Japan
Netherlands
Spain
Data Source: World Bank
Portugal
China
Germany
United
Kingdom
Italy
France
Korea, Rep. United States
India
Brazil
Russia
Mexico
INTERNATIONAL COMPARISON OF MONEY
GROWTH
Figure 1: 09-13 average M2 growth
20.0%
15.0%
10.0%
5.0%
0.0%
China
Russia
India
Data Source: World Bank
-5.0%
Brazil
Mexico
Korea, Rep.
Italy
Portugal
United States
France
Netherlands
Japan
United
Kingdom
Germany
Spain
POPULAR ARGUMENTS IN CHINESE MEDIA
• Chinese central bank is rapidly printing money.
• M2 is high
• M2 growth rate is high
• High inflation is going to come soon to China.
• M2/GDP is high: too much money chasing too few goods
• Quantity theory of money: 𝑀 × 𝑉 = 𝑃 × 𝑌
Do you agree or disagree?
IS CHINESE CENTRAL BANK PRINTING MONEY?
• M2 is high
• Stock vs. Flow
• M2 growth rate is high
• Banks can create money
Chinese Central Bank is not necessarily printing money, but is likely conducting
expansionary monetary policy.
IS INFLATION RATE IN CHINA GOING TO BE HIGH?
• Quantity theory of money: 𝑀
×𝑉 =𝑃 ×𝑌
• Real GDP growth was average above 7% in China
• Velocity depends on money demand: more willing to hold money after the financial crisis
• M2/GDP is high
• M2/GDP = M/(P × Y) = 1/V
Inflation needs not be high if monetary policy is flexible.
WHEN HYPERINFLATION IS LIKELY TO HAPPEN?
• Self-fulfilling: Expect inflation to happen
• Want to get rid of paper money (velocity increases)
• Central Bank Independence
• War finance: German (1920s), China (WWII), Zimbabwe (2006-2008)
• Political Influences