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A Monetary Conditions Index for Mainland China


Author Info

  • Wensheng Peng

    (Research Department, Hong Kong Monetary Authority)

  • Frank Leung

    (Research Department, Hong Kong Monetary Authority)


Economic and financial developments on the Mainland have important implications for Hong Kong. This paper presents an empirical framework for assessing monetary and financial conditions on the Mainland by estimating a monetary conditions index (MCI). An MCI is usually defined as a weighted sum of some measures of real interest rate and the real effective exchange rate (REER). Because bank credit is an important channel of monetary policy transmission mechanism in Mainland China, this study extends the conventional MCI by including a quantity variable to capture the credit availability effect. Estimates suggest that, in terms of the effect on real GDP growth, a rise in real interest rates by 1 percentage point is equivalent to an increase in REER appreciation by about 4 percentage points or a fall in real credit growth by 2.5 percentage points. The estimated MCI suggests a sharp easing in monetary conditions in 2002-2003, reflecting a weaker US dollar, relaxed credit stance of banks, and easing of deflation which reduced real interest rates. The fall in the MCI is equivalent to a decline of about 10 percentage points in real interest rates during the period. Easy monetary conditions have contributed to an acceleration in economic growth since 2002. Fears of overheating pressures prompted the authorities to implement administrative measures in early 2004 to curb credit supply to selected sectors and raise interest rates in late October 2004. The estimated MCI suggests that the tightening of monetary conditions is equivalent to a rise in real interest rates by about 4.6 percentage points.

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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0501.

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Length: 17 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:hkg:wpaper:0501

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Cited by:
  1. Vararat Khemangkorn & Roong Poshyananda Mallikamas & Pranee Sutthasri, 2008. "Inflation Dynamics and Implications on Monetary Policy," Working Papers 2008-02, Economic Research Department, Bank of Thailand.
  2. Arjeta Vokshi (Abazi), 2013. "A Monetary Conditions Index For Albania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(15), pages 18.
  3. Dong He & Frank Leung & Philip Ng, 2007. "How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?," Working Papers 0717, Hong Kong Monetary Authority.
  4. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Development Research Unit Working Paper Series 04-10, Monash University, Department of Economics.


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