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China's Monetary Policy Communication: Money Markets not only Listen, They also Understand

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  • Alicia Garcia-Herrero

    (Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research)

  • Eric Girardin

    (Aix-Marseille University and French National Center for Scientific Research (CNRS) and ˆ[cole des Hautes ˆ[tudes en Sciences Sociales (EHESS) and Hong Kong Institute for Monetary Research)

Abstract

Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People's Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China's money markets not only listen to the PBoC's words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC's governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China's money markets.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 022013.

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Length: 35 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:hkm:wpaper:022013

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Keywords: China Monetary Policy Communication; Money Market;

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