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Constructing the Monetary Conditions Index for China

Author

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  • Weibo Xiong

    (Department of Economics, Heriot-Watt University, Edinburgh EH14 4AS, United Kingdom)

Abstract

How can we fit different monetary transmission channels together to understand the effect of China¡¯s monetary policy? This paper focuses on China¡¯s monetary conditions and aggregate demand in terms of the monetary conditions index (MCI), which has been widely used as an important indicator for central banks, financial institutions, and scholars. To construct an MCI in the context of China over 1987Q1¨C2010Q2, we consider three channels through which monetary conditions might influence aggregate demand: the primary lending rate, the real effective exchange rate, and the bank credit. The weights of the component variables are obtained by estimating both the IS equation and the vector autoregressive model (VAR), which yield somewhat similar results. Further empirical tests show that the MCIs we derived contain useful information about future output growth and inflation in China over the short and medium term. From a historical perspective, the MCI we derived is more informative than individual monetary variables for the understanding of the development of China¡¯s monetary conditions between 1987 and 2010.

Suggested Citation

  • Weibo Xiong, 2012. "Constructing the Monetary Conditions Index for China," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 7(3), pages 373-406, September.
    • Handle: RePEc:fec:journl:v:7:y:2012:i:3:p:373-406
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-001-012-0017-8
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    Cited by:

    1. Lawson, Jeremy & Watt, Abigail & Martinez, Carolina & Fu, Rong, 2019. "Chinese Financial Conditions and their Spillovers to the Global Economy and Markets," CEPR Discussion Papers 14065, C.E.P.R. Discussion Papers.
    2. Manamani SAHOO, 2017. "Financial conditions index (FCI), inflation and growth: Some evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(612), A), pages 147-172, Autumn.

    More about this item

    Keywords

    monetary policy; People¡¯s Bank of China (PBC); monetary conditions index;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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