Empirical Study On The Relevance Of Monetary Condition Index And GDP Growth In China

It is a crucial time for the reform of exchange rate system and interest rate system. They become more and more flexible and important. Meanwhile, thay are also two key tools of monetary policy, and begin to play a greater role in monetary policy. Then, we should take both exchange rate and interest rate into account when we make the monetary policy in China.This paper applies monetary condition index, which concerns the effect of both interest rate factor and exchange rate factor on the monetary condition, shows the general monetary condition change of a country which is caused by the change of interest rate or exchange rate. With the further study of the relation between this index and GDP growth, we can see how the monetary condition index, exchange rate and interest rate effect the economic development.In this paper, it calculated the REER of China by the date of seven majoy trading nations. And with the data of real interest rate, it calculated the weight of exchange rate and interest rate by VAR. Then we can get the monetary condition index of China from 1980 to 2006. With the further study of the relation between this index and GDP growth, it turns out main conclusions as follows:First, interest rate has greater effect on GDP groth than exchange rate in China.Second, if it keeps exchange rate unchanged, interest rate increases (or decreases) 0.366 has the same effect as exchange rate decreases (or increases) 0.634 when interest rate unchanges.Third, monetary condition index has great effect on GDP growth. In can become a great tool to control economic development in China.