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China’s monetary policy and the exchange rate

  • Aaron Mehrotra
  • José R. Sánchez-Fung

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 behavior, 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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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2010-19.

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Date of creation: 2010
Date of revision:
Handle: RePEc:fip:fedfwp:2010-19
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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. Aaron Mehrotra & José R. Sánchez-Fung, 2010. "China’s monetary policy and the exchange rate," Working Paper Series 2010-19, Federal Reserve Bank of San Francisco.
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