Chinese monetary policy constitutes a marked example of a clash between theory and practice. In theory, a fixed exchange rate regime with capital mobility turns the money supply into an endogenous variable while expansionary pressure can be alleviated by the central bank by foreign currency...

This paper uses microeconomic data on firms’ money demand and investment in physical capital for the period 1983-2006 to estimate the extent to which variation in the U.S. money supply is an endogenous response to variation in firms’ demand for liquidity. We estimate a simple model in which...