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A Monetary Conditions Index for Mainland China


  • 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.

Suggested Citation

  • Wensheng Peng & Frank Leung, 2005. "A Monetary Conditions Index for Mainland China," Working Papers 0501, Hong Kong Monetary Authority.
  • Handle: RePEc:hkg:wpaper:0501

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    References listed on IDEAS

    1. Wensheng Peng & Frank Leung, 2005. "A Monetary Conditions Index for Mainland China," Working Papers 0501, Hong Kong Monetary Authority.
    2. Hans Genberg, 2003. "Foreign versus domestic factors as sources of macroeconomic fluctuations in Hong Kong," IHEID Working Papers 05-2003, Economics Section, The Graduate Institute of International Studies.
    3. Bernard J Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
    4. Tony Latter, 2007. "Rules versus discretion in managing the Hong Kong dollar, 1983-2006," Working Papers 022007, Hong Kong Institute for Monetary Research.
    5. Cho-Hoi Hui & Tom Fong, 2007. "Is the Hong Kong Dollar Exchange Rate "Bounded" in the Convertibility Zone?," Working Papers 0713, Hong Kong Monetary Authority.
    6. Hans Genberg & Li-gang Liu & Xiangrong Jin, 2006. "Hong Kong's Economic Integration and Business Cycle Synchronisation with Mainland China and the US," Working Papers 0611, Hong Kong Monetary Authority.
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    Cited by:

    1. Wai Ching Poon, 2010. "Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5?," Monash Economics Working Papers 25-10, Monash University, Department of Economics.
    2. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Monash Economics Working Papers 04-10, Monash University, Department of Economics.
    3. 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 1-18.
    4. Vararat Khemangkorn & Roong Poshyananda Mallikamas & Pranee Sutthasri, 2008. "Inflation Dynamics and Implications on Monetary Policy," Working Papers 2008-02, Monetary Policy Group, Bank of Thailand.
    5. 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.
    6. Wai-Ching Poon, 2008. "Does Credit Channel Matter in the Conduct of Monetary Policy in Singapore?," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 40-50, August.

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