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ID: 171075

Is Defense Spending Inflationary? Time–frequency Evidence from China / Xu, Yingying; Su, Chi Wei; Tao. Ran

Su, Chi Wei	Journal Article
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Summary/Abstract

This study examines the nexus between the defense spending growth rate and inflation to test whether defense spending is inflationary in China, particularly in times of peace. Using wavelet analysis, we find that the linkage between the defense spending growth rate and inflation changes over time and across frequencies. We provide evidence supporting negative leading effects of inflation on the defense spending growth rate in certain periods across various frequencies. The results illustrate that the relationship is stronger at the short- to medium-term horizon of less than eight years than it is in the long term. No positive leading effect of defense spending on inflation is demonstrated, showing that defense spending is not inflationary in China. The results indicate that inflation lowers the defense spending growth rate at short and medium scales, particularly in peace time. This study provides new insights into the nexus between defense spending and inflation and emphasizes that such a correlation has time and frequency features. Meanwhile, given that there is little evidence supporting the idea that defense spending is inflationary, a moderate increase in defense spending will not damage price stability in China.

Key Words

Defence Expenditure ; Inflation ; China ; Economic Growth ; Defence Spending ; Domain ;
Time Domain ; Frequency

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ID: 138903

Is there excess liquidity in China? / Liu, Tie Ying; Su, Chi Wei ; Jiang, Xu Zhao ; Chang, Tsangyao

Chang, Tsangyao	Article
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In this paper, we developed the recursive unit root tests proposed by Phillips et al. (2013) and used them to identify the beginning and the end of potential excess liquidity in the Chinese monetary market during the period from 1992 to 2013. The result indicates that excess liquidity existed from the third quarter of 2002 to 2013. The analysis shows that since 2003, the inflationary pressure of excess liquidity has remained high. We provide evidence supporting the money illusion hypothesis in China. The recursive unit root test is suited to practical implementation with time series and delivers a consistent date-stamping strategy for determining the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains.

Key Words

Excess Liquidity ; Bubbles ; Generalized Sup Augmented Dickey – Fuller Test ; Money llusion ; Sup Augmented Dickey – Fuller Test

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