A Simple Monetary Model of the Chinese Ecdonomy, 1958–1978

Abstract

In this paper, I construct a simple monetary model of the Chinese economy in the period of 1958–78. While, in previous researches, the demand for currency and a reaction function of monetary policy in China are generally investigated separately, in this paper both equations are combined so that the interactions between the household behavior of holding currency and the reaction of monetary policy makers can be investigated simultaneously. In constructing the model, I acknowledge some limitations that a few restricted assumptions are made and that I do not provide the rigorous theoretical proof. Despite these limitations, this simple monetary model exhibits relatively good performance from the ex-post historical simulation with the published data from Statistical Yearbook of China.