An analysis of Chinese money and prices using a McCallum-type rule

Authors: Koivu, Tuuli¹; Mehrotra, Aaron¹; Nuutilainen, Riikka²

Source: Journal of Chinese Economics and Business Studies, Volume 7, Number 2, May 2009 , pp. 219-235(17)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This paper evaluates the usefulness of a McCallum-type monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rule-based 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. 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

Document Type: Research article

DOI: 10.1080/14765280902847742

Affiliations: 1: Bank of Finland, Institute for Economies in Transition (BOFIT), FI-00101 Helsinki, Finland 2: University of Oulu, Finland

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