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McCallum rule and Chinese monetary policy

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  • Koivu, Tuuli
  • Mehrotra, Aaron
  • Nuutilainen, Riikka

Abstract

This paper evaluates the usefulness of a McCallum monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rulebased values provides information that improves the forecasting of price developments. The results suggest that our monetary variable helps in predicting both consumer and corporate goods price inflation, but the results for consumer prices depend on the forecasting period. Nevertheless, growth of the Chinese monetary base has tracked the McCallum rule quite closely. Moreover, results using a structural vector autoregression suggest that our measure of excess money supply could be used to identify monetary policy shocks in the Chinese economy

Suggested Citation

  • Koivu, Tuuli & Mehrotra, Aaron & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers 15/2008, Bank of Finland, Institute for Economies in Transition.
  • Handle: RePEc:bof:bofitp:2008_015
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    References listed on IDEAS

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    1. 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.
    2. Mehrotra, Aaron N., 2007. "Exchange and interest rate channels during a deflationary era--Evidence from Japan, Hong Kong and China," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 188-210, March.
    3. Banerjee, Anindya & Marcellino, Massimiliano, 2006. "Are there any reliable leading indicators for US inflation and GDP growth?," International Journal of Forecasting, Elsevier, vol. 22(1), pages 137-151.
    4. Mehrotra, Aaron & Sánchez-Fung, José R., 2008. "Forecasting inflation in China," BOFIT Discussion Papers 2/2008, Bank of Finland, Institute for Economies in Transition.
    5. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2003. "Macroeconomic forecasting in the Euro area: Country specific versus area-wide information," European Economic Review, Elsevier, vol. 47(1), pages 1-18, February.
    6. Li-gang Liu & Wenlang Zhang, 2007. "A New Keynesian Model for Analysing Monetary Policy in Mainland China," Working Papers 0718, Hong Kong Monetary Authority.
    7. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
    8. Goodhart, Charles & Boris Hofmann, 2002. "Asset Prices and the Conduct of Monetary Policy," Royal Economic Society Annual Conference 2002 88, Royal Economic Society.
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    10. 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.
    11. Koivu, Tuuli, 2008. "Has the Chinese economy become more sensitive to interest rates? : Studying credit demand in China," BOFIT Discussion Papers 1/2008, Bank of Finland, Institute for Economies in Transition.
    12. Bennett T. McCallum, 2003. "Japanese monetary policy, 1991-2001," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-31.
    13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    14. Bernard J Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
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    Cited by:

    1. Shujie Yao & Dan Luo & Lixia Loh, 2011. "On China’s Monetary Policy and Asset Prices," Discussion Papers 11/04, University of Nottingham, GEP.
    2. Shujie Yao & Dan Luo & Lixia Loh, 2013. "On China's monetary policy and asset prices," Applied Financial Economics, Taylor & Francis Journals, vol. 23(5), pages 377-392, March.

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