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A New Keynesian model for analysing monetary policy in Mainland China

  • Liu, Li-gang
  • Zhang, Wenlang
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    This paper adopts a four-equation New Keynesian model to evaluate the appropriateness of China's monetary policy framework. Our simulation results show that a hybrid rule that uses both interest rate and quantity of money as instruments outperforms the rules using one instrument alone at the current stage of economic and financial market development. Our analysis also shows that a sharp appreciation of the renminbi exchange rate, though effective in containing inflation pressures, would be quite disruptive to growth.

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    File URL: http://www.sciencedirect.com/science/article/B6W53-50HYG6G-2/2/912d173c29390ed2265fc5317d3bb542
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    Article provided by Elsevier in its journal Journal of Asian Economics.

    Volume (Year): 21 (2010)
    Issue (Month): 6 (December)
    Pages: 540-551

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    Handle: RePEc:eee:asieco:v:21:y:2010:i:6:p:540-551
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    1. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
    2. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    3. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
    4. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    5. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
    6. Dong He & Wenlang Zhang & Jimmy Shek, 2006. "How Efficient Has Been China's Investment? Empirical Evidence from National and Provincial Data," Working Papers 0619, Hong Kong Monetary Authority.
    7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    8. Bernard Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
    9. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
    10. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
    11. Jared Laxton & Igor Ermolaev & Charles Freedman & Ondra Kamenik & Michel Juillard & Douglas Laxton & Ioan Carabenciov & Dmitry Korshunov, 2008. "A Small Quarterly Multi-Country Projection Model," IMF Working Papers 08/279, International Monetary Fund.
    12. N'Diaye, Papa & Zhang, Ping & Zhang, Wenlang, 2010. "Structural reform, intra-regional trade, and medium-term growth prospects of East Asia and the Pacific--Perspectives from a new multi-region model," Journal of Asian Economics, Elsevier, vol. 21(1), pages 20-36, February.
    13. Scheibe, Jörg & Vines, David, 2005. "A Phillips Curve for China," CEPR Discussion Papers 4957, C.E.P.R. Discussion Papers.
    14. Zhang, Wenlang, 2009. "China's monetary policy: Quantity versus price rules," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 473-484, September.
    15. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
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