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

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Author Info
Dong He
Laurent L. Pauwels

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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. Copyright (c) 2008 The Hong Kong Monetary Authority Journal compilation (c) 2008 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1749-124X.2008.00134.x
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Article provided by Institute of World Economics and Politics, Chinese Academy of Social Sciences in its journal China & World Economy.

Volume (Year): 16 (2008)
Issue (Month): 6 ()
Pages: 1-21
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Handle: RePEc:bla:chinae:v:16:y:2008:i:6:p:1-21

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  2. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07. [Downloadable!] (restricted)
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  3. James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics 99-07, California Davis - Department of Economics. [Downloadable!]
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  4. Ling Hu & Peter C.B. Phillips, 2002. "Nonstationary Discrete Choice," Cowles Foundation Discussion Papers 1364, Cowles Foundation, Yale University. [Downloadable!]
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  5. Michael Dueker, 1999. "Measuring monetary policy inertia in target Fed funds rate changes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-10. [Downloadable!]
  6. Joon Y. Park & Peter C. B. Phillips, 2000. "Nonstationary Binary Choice," Econometrica, Econometric Society, vol. 68(5), pages 1249-1280, September.
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  7. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  8. Marvin Goodfriend & Eswar Prasad, 2007. "A Framework for Independent Monetary Policy in China," CESifo Economic Studies, Oxford University Press, vol. 53(1), pages 2-41, March. [Downloadable!] (restricted)
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  9. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
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