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China’s Monetary Policy Functions from the Core Inflation Perspective

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  • Yu Li Zhu
  • Lu Chang Rong

Abstract

Based on the open-economy new Keynesian model, this paper studies the influence of core inflation on the central bank’s monetary policy reaction rules by optimising the multi-target welfare loss functions, and draws three conclusions. Sustainable balance of payments should be considered as a goal rather than a tool for monetary policy. The central bank should focus more on core inflation than normal inflation in its daily operations. An authoritative core inflation sequence should be established as a focal point in the policymaking process. In addition, we emphasise that the central bank should accurately judge the impacts of real exchange rate changes, and adjust how frequently it intervenes in interest rates.

Suggested Citation

  • Yu Li Zhu & Lu Chang Rong, 2019. "China’s Monetary Policy Functions from the Core Inflation Perspective," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 20(3), pages 147-182, July.
  • Handle: RePEc:wej:wldecn:753
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