Monetary Policy and Inflation: Evidence from Xinjiang

Abstract

Abstract: Research Question: What are the effects of monetary policy on inflation? Motivation: Since the COVID-19 pandemic, global monetary policies have undergone unprecedented shifts. In 2020–21, most central banks adopted aggressive easing measures to cushion economic activity. By 2022–23, however, inflation surged, prompting widespread tightening to stabilize prices. More recently, by 2024, many economies returned to easing policies to prevent sharp slowdowns. These rapid and frequent policy adjustments highlight the importance of understanding the transmission mechanisms of monetary policy under evolving economic conditions. For China, where regional disparities in development remain pronounced, examining the effectiveness of monetary easing at the provincial level is critical for policymakers tasked with balancing development objectives and price stability. Idea: This paper investigates the effects of monetary easing on inflation in Xinjiang, China’s largest province with unique challenges —relatively slower economic development, rising living costs, and structural vulnerabilities. This provincial-level analysis captures localized dynamics and sheds light on how national monetary policy translates into inflationary pressures in less-developed regions. Data: The study uses annual data from 1994 to 2020, covering variables such as consumer prices, fixed asset investments, money supply, disposable income per capita, monetary policy-related interest rates, and West Texas Intermediate oil prices. Data sources include the National Bureau of Statistics, the Xinjiang Statistical Yearbook, International Financial Statistics, and the Federal Reserve Bank of St. Louis. Method/Tools: A Vector Autoregression (VAR) model is employed to assess the relationships between monetary policy and inflation. Findings: The study finds that the policy rate indirectly influences inflation in Xinjiang by affecting fixed asset investment and money supply. Expansionary monetary policies aimed at promoting development must be carefully calibrated to avoid exacerbating the cost of living. Contributions: This study provides understanding of how monetary policy affects inflation in less-developed areas, where transmission channels might differ from those at the national level. For policymakers, the findings offer practical guidance in designing monetary interventions that support growth objectives while mitigating inflationary risks. More broadly, the paper enriches debates on regional heterogeneity in monetary policy effectiveness, particularly in emerging economies with uneven development trajectories.