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The Breakdown of the Quantity Theory of Money in China after 2008 Financial Crises
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TitleThe Breakdown of the Quantity Theory of Money in China after 2008 Financial Crises  
AuthorChen Yanbin, Guo Yumei and Chen Weize  
OrganizationSchool of Economics, Renmin University of China; Department of Economics, Boston University;; 
Key WordsQuantity Theory of Money; Inflation; Monetary Policy; Housing Sector; Government Deficit 
AbstractAfter 2008 Financial Crises, the breakdown of the Quantity Theory of Money (QTM) in China displays a new feature that expansionary monetary policy with high money supply has not caused inflation it is supposed to be, while it goes with the soaring housing price and government deficit. How does the breakdown form in deed? Will the QTM revive? What are the macroeconomic impacts and monetary policy implications? To clarify and quantify them, this paper builds up a dynamic general equilibrium model in the presence of housing sector and government deficit. It shows that the booming of housing bubble and government deficit will enhance money demand of households and government, and then lower velocity of money as well as inflation rate. Moreover, the busting of housing bubble will increase inflation rate by 0.5 percents, and make the QTM revival. Therefore, the monetary authority in China should stabilize money supply and improve utilization of money stock, rather than using expansionary policy. 
Serial NumberWP738 
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