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Optimal Monetary Policy Rules in A Simple Stochastic Macro Model: China's Evidence

Author

Listed:
  • Shengzu Wang

    (McGill University)

  • Shen Guo

    (Concordia University)

Abstract

In this paper we apply a simple macro model to explore and evaluate certain optimal monetary policy rules for China's economy. To be more consistent with the central bank (the People's Bank of China)'s behaviour, we use money supply as a monetary policy instrument rather than the commonly used interest rate. Policy rules are optimal in terms of minimizing the predetermined loss functions, and the parameters of these rules are determined by stochastic simulation. Different forms of policy rule and loss function are considered, especially for exchange rate volatility and money supply volatility. The optimality of monetary policy rules is evaluated by comparing the shifts of policy frontiers.

Suggested Citation

  • Shengzu Wang & Shen Guo, 2005. "Optimal Monetary Policy Rules in A Simple Stochastic Macro Model: China's Evidence," Macroeconomics 0510009, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0510009 Note: Type of Document - pdf; pages: 26
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    File URL: http://econwpa.repec.org/eps/mac/papers/0510/0510009.pdf
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    References listed on IDEAS

    as
    1. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
    2. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 173-203.
    3. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
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    More about this item

    Keywords

    Monetary Policy Rule; Loss Function; Stochastic Simulation; Policy Frontier; China;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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