What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model

21 Pages Posted: 21 Nov 2008

See all articles by Dong He

Dong He

Hong Kong Monetary Authority; Hong Kong Institute for Monetary Research (HKIMR)

Laurent L. Pauwels

The University of Sydney

Abstract

In the present paper, we model the policy stance of the People's Bank of China (PBC) as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC's implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC's policy changes.

Suggested Citation

He, Dong and Pauwels, Laurent L., What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model. China & World Economy, Vol. 16, Issue 6, pp. 1-21, November-December 2008. Available at SSRN: https://ssrn.com/abstract=1304344 or http://dx.doi.org/10.1111/j.1749-124X.2008.00134.x

Dong He

Hong Kong Monetary Authority

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Hong Kong Institute for Monetary Research (HKIMR)

3 Garden Road, 8th Floor
Hong Kong
China

Laurent L. Pauwels

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
718
PlumX Metrics