James S Laurenceson and Callan Windsor, School of Economics Discussion Paper No. 435 September 2011, School of Economics, The University of Queensland. Australia.


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The effectiveness of China’s monetary policy hinges on the existence of a robust link between the growth of monetary aggregates and inflation. This paper considers this link during the 2000s using Structural VAR models and simulated out-of-sample forecasting techniques. The results indicate that the link is far from robust. Such findings serve to underscore the importance of institutional reforms that will enable interest rates to play a more prominent role as an instrument of monetary policy.