BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 10/2015:
Contemporary monetary policy in China: A move towards price-based policy?
Riikka Nuutilainen ()
Abstract: This paper focuses on monetary policy in China. A set of
different specifications for the monetary policy reaction function are
empirically evaluated using monthly data for 1999––2012. Variation is
allowed both in the policy targets as well as in the monetary policy
instrument itself. Overall, the performance of the estimated policy rules
is surprisingly good. Chinese monetary policy displays countercyclical
reactions to inflation and leaning-against-the-wind behaviour. The paper
shows that there is a notable increase in the overall responsiveness of
Chinese monetary policy over the course of the estimation period. The
central bank interest rate is irresponsive to economic conditions during
the earlier years of the sample but does respond in the later years. This
finding supports the view that the monetary policy settings of the People's
Bank of China have come to place more weight on price-based instruments. A
time-varying estimation procedure suggests that the two monetary policy
objectives are assigned to different instruments. The money supply
instrument is utilised to control the price level and (after 2008) the
interest rate instrument has been used to achieve the targeted output
growth.
Keywords: China; Monetary policy; Taylor rule; McCallum rule; (follow links to similar papers)
JEL-Codes: E52; E58; (follow links to similar papers)
33 pages, March 12, 2015
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