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Inflation Uncertainty and Monetary Policy in China

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  • Chengsi Zhang

Abstract

This paper uses a stochastic volatility model, structural break tests with unknown point, and a counterfactual simulation method to discuss the significant decline in inflation uncertainty in China over 1978–2009. We attempt to quantify the contributions of better monetary policy and smaller structural shocks (including demand, supply and policy impacts) on the reduced inflation uncertainty. Empirical results in the present paper suggest that improved monetary policy accounts for only a small fraction of the reduction in inflation uncertainty from the pre‐1997 period to the post‐1997 period in China. The bulk of the significant moderation in inflation uncertainty arises from smaller shocks. This finding indicates that the quiescence of inflation in China over the past decade could well be followed by a return to a more turbulent inflation era. Therefore, the use of preemptive monetary policy to anchor inflationary expectations and keep moderate inflation uncertainty is warranted.

Suggested Citation

  • Chengsi Zhang, 2010. "Inflation Uncertainty and Monetary Policy in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(3), pages 40-55, May.
    • Handle: RePEc:bla:chinae:v:18:y:2010:i:3:p:40-55
    DOI: 10.1111/j.1749-124X.2010.01195.x
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    1. Cheng-si Zhang & Da-yin Zhang & Jeffery Breece, 2011. "Financial Crisis, Monetary Policy, and Stock Market Volatility in China," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 371-388, November.
    2. Shen, Chung-Hua & Lin, Kun-Li & Guo, Na, 2016. "Hawk or dove: Switching regression model for the monetary policy reaction function in China," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 94-111.
    3. Zhang, Chengsi, 2013. "Money, housing, and inflation in China," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 75-87.
    4. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    5. Alex, Dony, 2021. "Anchoring of inflation expectations in large emerging economies," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    6. Shujie Yao & Dan Luo & Lixia Loh, 2011. "On China’s Monetary Policy and Asset Prices," Discussion Papers 11/04, University of Nottingham, GEP.

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