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Estimating forward-looking rules for China's Monetary Policy: A regime-switching perspective

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  • ZHENG, Tingguo
  • WANG, Xia
  • GUO, Huiming
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    Abstract

    This paper introduces a regime-switching forward-looking Taylor rule to describe the monetary policy behavior and considers its estimation using a two-step MLE procedure due to Kim and Nelson (2006), Kim (2009) and Zheng and Wang (2010). By doing an empirical analysis on quarterly data for China over the period 1992–2010, our results show that the actual reactions of China's monetary policy can be well characterized by a two-regime forward-looking Taylor rule. Furthermore, it is also suggested that the interest rate policy in response to inflation and output gap is asymmetric, behaving a significant characteristic of regime-switching nonlinearity. Specifically, in the first regime the People's Bank of China targets inflation, but not focuses on the output gap; while in the second regime the central bank targets the output gap and the policy rule is not a stable framework.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 23 (2012)
    Issue (Month): 1 ()
    Pages: 47-59

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    Handle: RePEc:eee:chieco:v:23:y:2012:i:1:p:47-59

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    Web page: http://www.elsevier.com/locate/chieco

    Related research

    Keywords: Taylor rule; Regime switching; Forward-looking; Monetary policy;

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    References

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    Cited by:
    1. Zheng, Tingguo & Guo, Huiming, 2013. "Estimating a small open economy DSGE model with indeterminacy: Evidence from China," Economic Modelling, Elsevier, vol. 31(C), pages 642-652.
    2. Funke , Michael & Paetz , Michael, 2012. "Financial system reforms and China’s monetary policy framework: A DSGE-based assessment of initiatives and proposals," BOFIT Discussion Papers 30/2012, Bank of Finland, Institute for Economies in Transition.
    3. repec:wyi:journl:002201 is not listed on IDEAS

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