This paper employs Autoregressive Distributed Lag (ARDL) models and monetary base growth to construct an exogenous and comprehensive monetary policy measure in China, where various monetary policy instruments co-exist, and the operational and intermediate targets are changing over time. Our methodology relies on the market equilibrium relationship instead of ad hoc policy rules and strict identiffcation assumptions, hence is robust to monetary policy frameworks in any economy. The empirical results show that the active monetary base growth (AMBG ) constructed via the ARDL models is an excellent description of the behavior of People’s Banks of China across time, and generates impacts on macro variables consistent with implications of macro theory when used in VAR analyses.

Using annual time series data (1978-2010), the present paper examines the nexus between financial intermediation development and economic fluctuation in China. The time series properties of the data are analyzed by bounds testing approach, ARDL model and vector error-correction model. The empirical results show that, there is long-term negative equilibrium relationship between financial intermediation development and economic fluctuation margin. However, although the short-term dynamics of volatility in economy growth can make adjustments in light of the long-term equilibrium relationship, it is not enough for economic fluctuation margin to revert to the equilibrium only through the error correction mechanism. Meanwhile, using the Granger causality test based on error correction model, the present paper finds the empirical evidence to support unidirectional Granger causality from financial intermediation development to economic fluctuation margin.