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A New Keynesian Model for Analysing Monetary Policy in Mainland China

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Author Info

  • Li-gang Liu

    (Research Department, Hong Kong Monetary Authority)

  • Wenlang Zhang

    (Research Department, Hong Kong Monetary Authority)

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    Abstract

    This paper adopts a three-equation New Keynesian model to evaluate the appropriateness of China's monetary policy framework. Our simulation results show that a hybrid rule that relies on both interest rate and quantity of money to conduct monetary policy appears to be more suitable than its alternatives at the current stage of economic and financial market development. Our simulation results also show that a sharp appreciation of the renminbi exchange rate would be disruptive to the inflation and output processes of the economy, despite its effectiveness in curbing inflation.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_18_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0718.

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    Length: 26 pages
    Date of creation: Nov 2007
    Date of revision:
    Handle: RePEc:hkg:wpaper:0718

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    Keywords: Monetary Policy Rule; New Keynesian Model; China;

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    1. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1998, C.E.P.R. Discussion Papers.
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