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A Conjecture of Chinese Monetary Policy Rule: Evidence from Survey Data, Markov Regime Switching, and Drifting Coefficients

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  • Yanbin Chen

    (School of Economics, Renmin University of China)

  • Zhen Huo

    (School of Economics, Renmin University of China)

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    Abstract

    This paper studies a modified Chinese Taylor¡¯s rule with money supply growth rate as the intermediate target. We develop survey data to measure the expected inflation and use the real marginal cost as a proxy for the output gap. The Markov regime switching model, the TVP model and the split sample OLS estimation are employed to estimate the changing coefficients of the monetary reaction function. We find that there were two structural changes in the Chinese monetary policy rule, which take the form of discrete jumps rather than continuous adjustments. Besides, the Chinese central bank is not purely forward-looking as most literature assumed.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 10 (2009)
    Issue (Month): 1 (May)
    Pages: 111-153

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    Handle: RePEc:cuf:journl:y:2009:v:10:i:1:p:111-153

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    Related research

    Keywords: Taylor¡¯s rule; Survey data; Real marginal cost; TVP model; Markov regime switching model;

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    1. Pier Francesco Asso & George A. Kahn & Robert Leeson, 2007. "The Taylor rule and the transformation of monetary policy," Research Working Paper, Federal Reserve Bank of Kansas City RWP 07-11, Federal Reserve Bank of Kansas City.
    2. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
    3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1908, C.E.P.R. Discussion Papers.
    4. Orphanides, Athanasios, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Working Paper Series, European Central Bank 0115, European Central Bank.
    5. Burdekin, Richard C.K. & Siklos, Pierre L., 2008. "What has driven Chinese monetary policy since 1990? Investigating the People's bank's policy rule," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(5), pages 847-859, September.
    6. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    7. Kim, Chang-Jin, 2006. "Time-varying parameter models with endogenous regressors," Economics Letters, Elsevier, Elsevier, vol. 91(1), pages 21-26, April.
    8. Troy Davig & Eric Leeper, 2006. "Endogenous monetary policy regime change," Research Working Paper, Federal Reserve Bank of Kansas City RWP 06-11, Federal Reserve Bank of Kansas City.
    9. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
    10. Forsells, Magnus & Kenny, Geoff, 2002. "The rationality of consumers' inflation expectations: survey-based evidence for the euro area," Working Paper Series, European Central Bank 0163, European Central Bank.
    11. Athanasios Orphanides, 2002. "Monetary policy rules and the Great Inflation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-8, Board of Governors of the Federal Reserve System (U.S.).
    12. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262112388, December.
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