Does China target NGDP?

Much of the debate about NGDP targeting in the blogosphere is about what the Federal Reserve should do. However, I think it is equally important to discuss and focus on what monetary regimes are preferable for other countries. I hope I will be able to increase the focus among Market Monetarists on monetary policy in other countries than the US.

Given that China is the second largest economy is the world it is somewhat surprising how little interest their is in Chinese monetary policy and especially in what are the key drivers of Chinese monetary policy. A working paper – “McCallum rule and Chinese monetary policy” – by Tuuli Koivu, Aaron Mehrotra and Riikka Nuutilainen from 2008 sheds more light on this important topic and Market Monetarists should be very interested in the results.

Here is the abstract:

“This paper evaluates the usefulness of a McCallum monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rule-based values provides information that improves the forecasting of price developments. The results suggest that our monetary variable helps in predicting both consumer and corporate goods price inflation, but the results for consumer prices depend on the forecasting period. Nevertheless, growth of the Chinese monetary base has tracked the McCallum rule quite closely. Moreover, results using a structural vector autoregression suggest that our measure of excess money supply could be used to identify monetary policy shocks in the Chinese economy.”

Hence, according to the authors the People’s Bank of China (PBoC) follow a McCallum rule whereby they use the money base to hit a given target for growth in nominal GDP (NGDP).

This in my view is a highly interesting result and it is somewhat of a surprise that these empirical results have not gotten more attention – especially given China’s impressive economic performance in recent years. Furthermore, it would be extremely interesting to see how the results would look if they where updated to include the Great Recession period. I am sure there is lot of aspiring Market Monetarists out there who are getting ready to update these results…

The PBoC is certainly not conducting monetary policy in a transparent way and the Chinese financial markets remain overly regulated, but at least it seems like the PBoC got their money base control more or less right.

Tim Lee – Market Monetarist

Timothy B. Lee at the Cato Institute has a couple of interesting comments out on US monetary policy – they are at the core very much Market Monetarist.

Here is a few recommendations:

Fighting the Last Monetary War (Happy to see Tim is reading Friedman’s Money Mischief – one of my favourite books)
More on Nominal Sales and Monetary Policy (happy to see a tribute to William Niskanen’s monetary policy views)
Beckworth, Ponnuru and Niskanen on Monetary Policy (Tim, you make us proud…)

Most Market Monetarists talk about NGDP level targeting, but I guess people like Beckworth and Woolsey would prefer targeting “nominal final sales to domestic purchasers” as William Niskanen suggested. I have sympathy for that as well – especially if I think of none-US monetary policy then a target on what I would call final domestic spending would be appropriate. Furthermore, final sales was also Clark Warburton’s prefered measure for Py and given I think Warburton is the most underappreciated monetarist ever it is only natural for me to advocate to use final sales rather NGDP as a measure of Py.

Anyway, nice to see a Cato scholar on board. The Cato Institute has been at the forefront of “policy development” in the US for decades and it’s annual monetary conference continues to be hugely influential on US and global thinking about monetary policy and theory so it is truly great that Tim is spreading the message from William Niskanen.

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