Fiscal Policy, Monetary Targets, and the Price Level in a Centrally Planned Economy: An Application to the Case of China.

This paper presents a planned-economy monetary model of China. A money supply equation links changes in broad money to government transactions evaluated at official prices. The demand for real money balances by consumers equals the nominal demand for money deflated by an unobserved true price index. The model explains money demand as the divergence between the then official and true price indices. Changes in the money supply are explained by government transactions, while money demand is explained by real income and the anticipated true rate of inflation. The true rate of inflation is 2.5 times the official rate. Copyright 1987 by Ohio State University Press.