China's Monetary Policy Communication: Money Markets Not Only Listen, They Also Understand

HKIMR Working Paper No.02/2013

35 Pages Posted: 18 Jan 2013 Last revised: 19 Feb 2013

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Eric Girardin

University Aix-Marseille 2 - GREQAM

Date Written: January 17, 2013

Abstract

Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People’s Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China’s money markets not only listen to the PBoC’s words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC’s governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China’s money markets.

Keywords: China Monetary Policy Communication, Money Market

JEL Classification: E52, E58, E43

Suggested Citation

Garcia-Herrero, Alicia and Girardin, Eric, China's Monetary Policy Communication: Money Markets Not Only Listen, They Also Understand (January 17, 2013). HKIMR Working Paper No.02/2013, Available at SSRN: https://ssrn.com/abstract=2202602 or http://dx.doi.org/10.2139/ssrn.2202602

Alicia Garcia-Herrero

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France

Eric Girardin (Contact Author)

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

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