Why is Inflation in China a Monetary Phenomenon?

Abstract This paper proposes that inflation in China during the post‐reform era (1978 onwards) is always a monetary phenomenon. We construct a multivariate dynamic model based on Friedman's quantity theory of money and use the standard Granger causality test to show that money growth contains significant predictive power for inflation during the underlying period. The finding is robust to alternative measures of monetary aggregates and both closed and open economy frameworks. The baseline finding of the paper indicates that quantitative tools remain the most important policy instruments for China to manage its inflation effectively.