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The Taylor Rules and Macroeconomic Fluctuation in China: 1994–2006

Author

Listed:
  • Qiong Li

    (Strategic Planning Department, The People’s Insurance Company (Group) of China, Beijing 100084, China)

  • Zhiwei Wang

    (School of Economics, Peking University, Beijing 100871, China)

Abstract

The correlation and controllability of money supply as the intermediate object of monetary policy is gradually weakening, the argument that interest rate substitutes the money supply for the alternative object is hotly discussed. According to the Taylor rule and its extensions, this paper has a positive analysis on the efficiency of Taylor-type rules in China through historical analysis, policy reaction function approach and co-integration technology of time series analysis. This paper draws a conclusion that Taylor rule is unstable in China, and less correlation can be found between interest rate and the output gap, and the central bank focus on the inflation target rather than economic growth. Therefore, the central bank should abide by the simple rule of inflation targeting.

Suggested Citation

  • Qiong Li & Zhiwei Wang, 2010. "The Taylor Rules and Macroeconomic Fluctuation in China: 1994–2006," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 5(2), pages 232-253, June.
    • Handle: RePEc:fec:journl:v:5:y:2010:i:2:p:232-253
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-010-0012-5
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    More about this item

    Keywords

    Taylor rule; historical analysis; GMM test; co-integration analysis;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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