Inflation and China's Monetary Policy Reaction Function: 2002–2013

12 Pages Posted: 6 Oct 2014

See all articles by Eric Girardin

Eric Girardin

University Aix-Marseille 2 - GREQAM

Sandrine Lunven

TAC ECONOMICS; University of Angers - Research Group in Quantitative Saving (GREQAM)

Guonan Ma

Bruegel

Date Written: March 2014

Abstract

Our paper attempts to enhance the understanding of China’s monetary policy rule, which may help explain the country’s remarkable inflation performance over the past decade, in spite of the absence of explicit inflation targeting. In particular, we aim to shed light on the role of inflation in the conduct of monetary policy by the People’s Bank of China (PBC) in the New Millennium, when both the underlying economy and its monetary policy framework were transformed. We develop a new monetary policy index (MPI) in China by combining quantity, price and administrative instruments and estimate a hybrid (backward- and forward-looking), dynamic, discrete-choice model for the period 2002-13. Three main results arise from the paper. First, the Chinese monetary policy changes under PBC Governor Zhou from 2002 onwards have been relatively hawkish and smoothed. Second, the PBC appears to have built up a monetary policy framework similar to implicit flexible inflation targeting, with a hybrid reaction function, seemingly taking into account the forward-looking aspect of inflation. Third, the PBC’s behaviour post-2002 resembles that of the post-1979 anti-inflation policy of the G3 central banks, albeit with a high output weight typical of emerging economies.

Full publication: Globalisation, Inflation and Monetary Policy in Asia and the Pacific

Keywords: monetary policy in China, People’s Bank of China, Taylor rule, inflation targeting

JEL Classification: E52, E58, O11, O52

Suggested Citation

Girardin, Eric and Lunven, Sandrine and Ma, Guonan, Inflation and China's Monetary Policy Reaction Function: 2002–2013 (March 2014). BIS Paper No. 77l, Available at SSRN: https://ssrn.com/abstract=2474036

Eric Girardin

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Sandrine Lunven

TAC ECONOMICS ( email )

La Saigeais
Saint Hilaire des Landes, Bretagne 35140
France

HOME PAGE: http://www.taceconomics.com

University of Angers - Research Group in Quantitative Saving (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

Guonan Ma

Bruegel ( email )

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

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