Measurement of Repressed Inflation in China: The Lack of Coordination between Monetary Policy and Price Controls

Abstract

We estimate a measure of the repression of the Chinese price level by developing a simple analytical model which derives a 'true' rate of inflation on the basis of the different rates of change of the stock of money in circulation and the nominal value of retail sales. This true rate of inflation is then used to explain changes in quasi-money balances. We estimate this model for the period 1979-1988 using quarterly data. The results strongly support the hypothesis of repressed inflation. The annual rate of inflation of the 'true' price index is approximately 12.4 percent higher than that of the official price index over the 10-year period.

Keywords: China, Repressed inflation, Price controls

JEL Classification: E41, O53, P24