A New Keynesian model for analysing monetary policy in Mainland China

This paper adopts a four-equation New Keynesian model to evaluate the appropriateness of China'smonetary policy framework. Our simulation results show that a hybrid rule that uses both interest rate and quantity of money as instruments outperforms the rules using one instrument alone at the current stage of economic and financialmarket development. Our analysis also shows that a sharp appreciation of the renminbi exchange rate, though effective in containing inflation pressures, would be quite disruptive to growth. (C) 2010 Elsevier Inc. All rights reserved.