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China’s monetary policy and the exchange rate

Listed author(s):
  • 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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File URL: http://www.frbsf.org/publications/economics/papers/2010/wp10-19bk.pdf
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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
Handle: RePEc:fip:fedfwp:2010-19
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  1. Candelon, Bertrand & Lutkepohl, Helmut, 2001. "On the reliability of Chow-type tests for parameter constancy in multivariate dynamic models," Economics Letters, Elsevier, vol. 73(2), pages 155-160, November.
  2. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters,in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  3. Aaron Mehrotra & José R Sánchez-Fung, 2010. "China's Monetary Policy and the Exchange Rate," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 52(4), pages 497-514, December.
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  7. Tuuli Koivu & Aaron Mehrotra & Riikka Nuutilainen, 2009. "An analysis of Chinese money and prices using a McCallum-type rule," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 7(2), pages 219-235.
  8. Zhang, Wenlang, 2009. "China's monetary policy: Quantity versus price rules," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 473-484, September.
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  12. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  13. 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, February.
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  15. Jeffrey A. Frankel, 2009. "New Estimation Of China'S Exchange Rate Regime," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 346-360, August.
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  17. Barry Naughton, 2007. "The Chinese Economy: Transitions and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640643, January.
  18. Tomasz Koluk & Aaron Mehrotra, 2009. "The impact of Chinese monetary policy shocks on East and South-East Asia," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 17(1), pages 121-145, January.
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