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Evaluating McCallum rule as a policy guideline for China

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  • Shuzhang Sun
  • Christopher Gan
  • Baiding Hu

Abstract

Economists have reached a consensus that central bank can improve their policy efficiency by following a monetary policy rule. Given that money supply is the principal policy instrument of the People's Bank of China (PBC) and its monetary targeting regime, this paper utilizes the counterfactual simulation method to evaluate the feasibility of the McCallum rule as a policy guideline for China in two simple macroeconomic models. The simulation results show that following the McCallum rule could significantly reduce China's nominal GDP fluctuations. The analysis shows that a rule-specified path for monetary base changes could be used as a benchmark for PBC's policy decision. Therefore, we strongly advocate that the PBC adopt the McCallum rule as its policy guideline in future policymaking.

Suggested Citation

  • Shuzhang Sun & Christopher Gan & Baiding Hu, 2012. "Evaluating McCallum rule as a policy guideline for China," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 17(3), pages 527-545.
    • Handle: RePEc:taf:rjapxx:v:17:y:2012:i:3:p:527-545
    DOI: 10.1080/13547860.2012.694714
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    Cited by:

    1. Mogaji, Dr Peter Kehinde, 2016. "Monetary Reactions in the West African Monetary Zone: Evaluation of Homogeneity and Expected Loss of Monetary Independence," MPRA Paper 86723, University Library of Munich, Germany.
    2. Klingelhöfer, Jan & Sun, Rongrong, 2018. "China's regime-switching monetary policy," Economic Modelling, Elsevier, vol. 68(C), pages 32-40.
    3. Jung, Alexander, 2018. "Does McCallum’s rule outperform Taylor’s rule during the financial crisis?," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 9-21.
    4. Funke, Michael & Tsang, Andrew, 2020. "The People’s bank of China’s response to the coronavirus pandemic: A quantitative assessment," Economic Modelling, Elsevier, vol. 93(C), pages 465-473.
    5. Mogaji, Peter Kehinde, 2015. "Policy Rule-based Stress Tests of Monetary Integration and Single Monetary Policy in the West African Monetary Zone," MPRA Paper 86720, University Library of Munich, Germany.

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