Essays on inflation, output and monetary policy in post reform China

China’s economic achievement over the past three decades has been remarkable. It has managed to maintain a sustained period of unprecedented growth since its reform and “opening-up” policies of 1978. As China is now as important an engine for growth in the world economy as the United States, understanding fragilities in Chinese macroeconomic structures is more important than ever before. Due to its increased integration into the global economy, interpreting the dynamics of Chinese inflation, output growth and monetary policy is vital, both in theory and in practice, especially for central banks in the conduct of economic policy. This thesis will attempt to provide an analysis of the dynamics of inflation, output and monetary policy in the Chinese economy through augmented versions of a Phillips curve, an Investment Savings (IS) curve and a monetary policy “Taylor type” rule. The thesis is structured as follows. Chapter 1 gives an introduction to the thesis, establishes the motivation for this research, outlines the methodology as well as the central research question, and discusses the structure of the thesis. Chapter 2 provides a general overview of the Chinese economy while discussing some of the main macroeconomic indicators. Chapter 3 examines the inflation process in China by estimating variations of the Phillips curve. Chapter 4 investigates the effectiveness of the monetary policy transmission channel in China by estimating an IS curve equation using a monetary policy index (MPI), which has been calculated from a combination of the quantitative and qualitative instruments used by the People’s Bank of China (PBOC). Chapter 5 estimates a monetary policy or “Taylor type” rule for China to examine the reaction of the monetary authority to macroeconomic targets. Finally, Chapter 6 concludes, provides scope for policy actions and responses, points out limitations with the thesis and describes plans for future research.