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China's Monetary Policy and the Exchange Rate

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  • Aaron Mehrotra

    ()
    (Bank of Finland, Institute for Economies in Transition (BOFIT), PO Box 160, FI-00101 Helsinki, Finland.)

  • Jos� R S�nchez-Fung

    ()
    (School of Economics, Kingston University, London, Penrhyn Road, Kingston upon Thames, Surrey, KT1 2EE, UK.)

Abstract

The paper models monetary policy in China using a hybrid McCallum–Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behaviour, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 52 (2010)
Issue (Month): 4 (December)
Pages: 497-514

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Handle: RePEc:pal:compes:v:52:y:2010:i:4:p:497-514

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References

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  1. Aaron Mehrotra & José R. Sánchez-Fung, 2010. "China’s monetary policy and the exchange rate," Working Paper Series 2010-19, Federal Reserve Bank of San Francisco.
  2. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
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Cited by:
  1. Shujie Yao & Dan Luo & Lixia Loh, . "On China’s Monetary Policy and Asset Prices," Discussion Papers 11/04, University of Nottingham, GEP.
  2. Yutaka Kurihara, 2012. "Exchange rate determination and structural changes in response to monetary policies," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(3), pages 187-196, August.
  3. Aaron Mehrotra & José R. Sánchez-Fung, 2010. "China’s monetary policy and the exchange rate," Working Paper Series 2010-19, Federal Reserve Bank of San Francisco.
  4. Marjan Petreski & Branimir Jovanovic, 2013. "Monetary Policy in China: The Role of the Qualitative Instruments," Transition Studies Review, Springer, vol. 20(3), pages 437-442, November.

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