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China's Monetary Policy and the Exchange Rate

  • 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.)

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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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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  1. 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.
  2. Mehrotra, Aaron & Sánchez-Fung, José R., 2010. "China’s monetary policy and the exchange rate," BOFIT Discussion Papers 10/2010, Bank of Finland, Institute for Economies in Transition.
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