BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 10/2010:
China’s monetary policy and the exchange rate
Aaron Mehrotra ()
and José R. Sánchez-Fung
Abstract: The paper models monetary policy in China using a hybrid
McCallum-Taylor empirical reaction function. The feedback rule allows for
reactions to inflation and output gaps, and to developments in a
trade-weighted exchange rate gap measure. The investigation finds that
monetary policy in China has, on average, accommodated inflationary
developments. But exchange rate shocks do not significantly affect monetary
policy behavior, and there is no evidence of a structural break in the
estimated reaction function at the end of the strict dollar peg in July
2005. The paper also runs an exercise incorporating survey-based inflation
expectations into the policy reaction function and meets with some
success.
Keywords: exchange rate; hybrid McCallum-Taylor monetary policy reaction function; SVAR; survey-based inflation expectations; China; (follow links to similar papers)
JEL-Codes: E42; E52; (follow links to similar papers)
27 pages, July 20, 2010
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