Optimal Monetary Policy in China with Money as Not Redundant

Guoxiong Zhang

Australian Economic Review, 2019, vol. 52, issue 3, 294-304

Abstract: This article provides three pieces of evidence to show that money is not redundant in China: aggregate real money balance can affect aggregate demand even when its effect through short‐term interest rates is controlled. I estimate a DSGE model using Chinese data. With the estimated model, I find that monetary policy that controls the money supply (the quantity rule) is better than the one that controls the short‐term interest rate (the price rule) in terms of minimising welfare loss. I then discuss the optimal monetary policy that combines both the price rule and the quantity rule.

Date: 2019
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