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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