China's Evolving Monetary Policy Rule: From Inflation-Accommodating to Anti-Inflation Policy

35 Pages Posted: 7 Jun 2017

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: June 2017

Abstract

This paper aims to enhance the understanding of China's monetary policy rule since the mid-1990s, focusing on the role of inflation. It investigates the rule followed by the People's Bank of China (PBoC) by considering both the structural economic transformation of China and its evolving monetary policy framework.

Our newly constructed monthly composite discrete monetary policy index (MPI), which combines price, quantity and administrative instruments, shows a change in style towards smoother but more contractionary policy moves from 2002 onwards. The estimation of a dynamic discrete-choice model à la Monokroussos (2011) implies that, from this point onwards, the conduct of monetary policy has been characterised by implicit inflation targeting. While the PBoC's behaviour up to 2001 was reminiscent of that in the inflation-accommodating G3 economies of the United States, euro area and Japan up to 1979, it has been characterized since 2002 by a policy rule similar to the post-1979 anti-inflation (forward-looking) policy of the G3. An accurate estimation of the monetary policy rule from 2002 needs to consider China as an open economy, as a result of its rapid liberalisation of trade and finance after its WTO accession. As such, the influence of US interest rates has become increasingly significant for Chinese monetary policy.

Keywords: monetary policy in China, People's Bank of China, Taylor rule, inflation targeting, discrete-choice model, open-economy model

JEL Classification: E52, E58, O11, O52

Suggested Citation

Girardin, Eric and Lunven, Sandrine and Ma, Guonan, China's Evolving Monetary Policy Rule: From Inflation-Accommodating to Anti-Inflation Policy (June 2017). BIS Working Paper No. 641, Available at SSRN: https://ssrn.com/abstract=2980353

Eric Girardin

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Sandrine Lunven (Contact Author)

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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