chapter  6
14 Pages

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

ByTUULI KOIVU, AARON MEHROTRA, RIIKKA NUUTILAINEN

The literature on monetary policy rules is related to the formal analysis of rules versus discretion by Kydland and Prescott (1977), and there is now ample literature on evaluating monetary policy by estimating simple policy rules. One should not assume that all aspects of policy could be summarised by such a rule or that the central bank could mechanically follow a rule. Nevertheless, use of a rule in evaluating monetary policy may render it easier to communicate to the general public, who will in turn be better able to judge the central bank’s performance vis-à-vis its objectives. The literature on estimating monetary policy rules has focused predominantly on advanced economies, especially via the estimation of Taylor-type interest-rate feedback rules (see Taylor, 1993). In contrast, little such work has been done on developing or emerging economies.