BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 15/2008:
McCallum rule and Chinese monetary policy
Aaron Mehrotra ()
, Tuuli Koivu ()
and Riikka Nuutilainen
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.
Keywords: McCallum rule; monetary policy; China; (follow links to similar papers)
JEL-Codes: E31; E52; (follow links to similar papers)
29 pages, November 21, 2008
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