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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front Econ Chin    2012, Vol. 7 Issue (3) : 373-406
Constructing the Monetary Conditions Index for China
Weibo Xiong()
Department of Economics, Heriot-Watt University, Edinburgh EH14 4AS, United Kingdom
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How can we fit different monetary transmission channels together to understand the effect of China’s monetary policy? This paper focuses on China’s monetary conditions and aggregate demand in terms of the monetary conditions index (MCI), which has been widely used as an important indicator for central banks, financial institutions, and scholars. To construct an MCI in the context of China over 1987Q1–2010Q2, we consider three channels through which monetary conditions might influence aggregate demand: the primary lending rate, the real effective exchange rate, and the bank credit. The weights of the component variables are obtained by estimating both the IS equation and the vector autoregressive model (VAR), which yield somewhat similar results. Further empirical tests show that the MCIs we derived contain useful information about future output growth and inflation in China over the short and medium term. From a historical perspective, the MCI we derived is more informative than individual monetary variables for the understanding of the development of China’s monetary conditions between 1987 and 2010.

Keywords monetary policy      People’s Bank of China (PBC)      monetary conditions index     
Corresponding Author(s): Weibo Xiong,   
Issue Date: 05 September 2012
 Cite this article:   
Weibo Xiong. Constructing the Monetary Conditions Index for China[J]. Front Econ Chin, 2012, 7(3): 373-406.
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