Is money targeting an option for the People's Bank of China?

Abstract

This study examines which monetary aggregates, namely nominal M0, M1 and M2, can be used by the People’s Bank of China to conduct monetary policy. The model includes real M0, M1 and M2 as the dependent variable respectively and their determinants, such as real income, real inflation rate, and real rate of one-year saving deposit. Johansen (1988) and Johansen and Juselius’s (1990) procedures are used to estimate the long-run relationship between the monetary aggregates and their variables. Short-run model is applied to M0, M1 and M2 respectively to see whether the error term is negative to validate the significance of the long-run relationship using the Ordinary Least Square estimation.