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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

    (Research Department, Hong Kong Monetary Authority)

  • Laurent Pauwels

    (Research Department, Hong Kong Monetary Authority)

Abstract

In this paper, we model the policy stance of the People¡¦s Bank of China (PBoC) 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 PBoC. In a second step, we estimate how much of the variation in the PBoC'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 figured significantly in PBoC's policy changes, but not output gaps.

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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0806.

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Length: 35 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:hkg:wpaper:0806

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Keywords: Monetary policy; People's Bank of China; qualitative response models; large factor models;

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  1. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  2. Peter C.B. Phillips & Joon Y. Park, 1999. "Nonstationary Binary Choice," Cowles Foundation Discussion Papers 1223, Cowles Foundation for Research in Economics, Yale University.
  3. Marvin Goodfriend & Eswar Prasad, 2007. "A Framework for Independent Monetary Policy in China," CESifo Economic Studies, CESifo, vol. 53(1), pages 2-41, March.
  4. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
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  6. Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics 519, Boston College Department of Economics.
  7. Oscar Jorda & James D. Hamilton, 2003. "A model for the federal funds rate target," Working Papers 997, University of California, Davis, Department of Economics.
  8. 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.
  9. Hu, Ling & Phillips, Peter C. B., 2004. "Nonstationary discrete choice," Journal of Econometrics, Elsevier, vol. 120(1), pages 103-138, May.
  10. Bernard Laurens & Rodolfo Maino, 2007. "China," IMF Working Papers 07/14, International Monetary Fund.
  11. Geiger, Michael, 2006. "Monetary Policy in China (1994-2004) : Targets, Instruments and their Effectiveness," W.E.P. - Würzburg Economic Papers 68, University of Würzburg, Chair for Monetary Policy and International Economics.
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Cited by:
  1. Fredj Jawadi & Sushanta K. Mallick & Ricardo M. Sousa, 2011. "Monetary Policy Rules in the BRICS: How Important is Nonlinearity?," NIPE Working Papers 18/2011, NIPE - Universidade do Minho.
  2. Dong He & Paul Luk, 2013. "A Model of Chinese Capital Account Liberalisation," Working Papers 122013, Hong Kong Institute for Monetary Research.
  3. Dong He & Honglin Wang & Xiangrong Yu, 2014. "Interest Rate Determination in China: Past, Present, and Future," Working Papers 042014, Hong Kong Institute for Monetary Research.
  4. Sun, Rongrong, 2012. "Does Monetary Policy Matter in China? A Narrative Approach," MPRA Paper 45023, University Library of Munich, Germany.
  5. Chang Shu & Dong He & Xiaoqiang Cheng, 2014. "One Currency, Two Markets: The Renminbi's Growing Influence in Asia-Pacific," Working Papers 102014, Hong Kong Institute for Monetary Research.
  6. Dong He & Honglin Wang, 2011. "Dual-Track Interest Rates and the Conduct of Monetary Policy in China," Working Papers 212011, Hong Kong Institute for Monetary Research.
  7. Dong He & Honglin Wang, 2013. "Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data," Working Papers 162013, Hong Kong Institute for Monetary Research.
  8. Körner, Finn Marten & Ehnts, Dirk H., 2013. "Chinese monetary policy – from theory to practice," MPRA Paper 44264, University Library of Munich, Germany.
  9. Xiong , Qiyue, 2013. "The role of the bank lending channel and impacts of stricter capital requirements on the Chinese banking industry," BOFIT Discussion Papers 7/2013, Bank of Finland, Institute for Economies in Transition.
  10. Xiong, Weibo, 2012. "Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis," China Economic Review, Elsevier, vol. 23(3), pages 512-533.

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