The Impact of Money Supply on the Price: Evidence from China

Abstract

Different from the cointegration methodology flooding empirical literature, I resume debate regarding the impact of money supply on the overall price level by testing structural breaks of China’s monetary aggregates from December 1999 to April 2012. The results show that the time series of logarithms of M0, M1 and M2 are all piecewise stationary with structural breakpoints being found at 1%, 5% or 10% critical levels. Furthermore, I find the overall price trends after structural changes can be estimated accurately according to the characteristics of these endogenous breaks. Such findings provide a new perspective for the effect evaluation of monetary policy.