Evaluating McCallum rule as a policy guideline for China

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. (J Asia Pac Econ/GIGA)