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What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model

Author Info

  • Dong He

    (Research Department, Hong Kong Monetary Authority)

  • Laurent Pauwels

    (Research Department, Hong Kong Monetary Authority)

Abstract

In this paper, we model the policy stance of the People¡¦s Bank of China (PBoC) as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBoC. In a second step, we estimate how much of the variation in the PBoC's implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets figured significantly in PBoC's policy changes, but not output gaps.

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Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0806.

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Length: 35 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:hkg:wpaper:0806
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Keywords: Monetary policy; People's Bank of China; qualitative response models; large factor models;

Other versions of this item:

Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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  8. James D. Hamilton & Oscar Jorda, 2000. "A Model for the Federal Funds Rate Target," NBER Working Papers 7847, National Bureau of Economic Research, Inc.
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  10. Joon Y. Park & Peter C. B. Phillips, 1999. "Nonstationary Binary Choice," Working Paper Series no5, Institute of Economic Research, Seoul National University.
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Cited by:

  1. He, Dong & Wang, Honglin, 2011. "Dual-track interest rates and the conduct of monetary policy in China," BOFIT Discussion Papers 21/2011, Bank of Finland, Institute for Economies in Transition.
  2. Dong He & Honglin Wang & Xiangrong Yu, 2014. "Interest Rate Determination in China: Past, Present, and Future," Working Papers 042014, Hong Kong Institute for Monetary Research.
  3. Chang Shu & Dong He & Xiaoqiang Cheng, 2014. "One currency, two markets: the renminbi’s growing influence in Asia-Pacific," BIS Working Papers 446, Bank for International Settlements.
  4. Fredj Jawadi & Sushanta K. Mallick & Ricardo M. Sousa, 2011. "Monetary Policy Rules in the BRICS: How Important is Nonlinearity?," NIPE Working Papers 18/2011, NIPE - Universidade do Minho.
  5. Xiong, Qiyue, 2013. "The role of the bank lending channel and impacts of stricter capital requirements on the Chinese banking industry," BOFIT Discussion Papers 7/2013, Bank of Finland, Institute for Economies in Transition.
  6. Dong He, 2014. "Comments on Eric Girardin, Sandrine Lunven and Guonan Ma's paper," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 171-174 Bank for International Settlements.
  7. Sun, Rongrong, 2012. "Does Monetary Policy Matter in China? A Narrative Approach," MPRA Paper 45023, University Library of Munich, Germany.
  8. Dong He & Honglin Wang, 2013. "Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data," Working Papers 162013, Hong Kong Institute for Monetary Research.
  9. Dong He & Paul Luk, 2013. "A Model of Chinese Capital Account Liberalisation," Working Papers 122013, Hong Kong Institute for Monetary Research.
  10. Sun, Rongrong, 2015. "What measures Chinese monetary policy?," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 263-286.
  11. Peter Tillmann, 2014. "Unconventional Monetary Policy Shocks and the Spillovers to Emerging Markets," Working Papers 182014, Hong Kong Institute for Monetary Research.
  12. Rongrong Sun, 2015. "What Measures Chinese Monetary Policy?," Working Papers 072015, Hong Kong Institute for Monetary Research.
  13. Sun, Rongrong, 2015. "A Narrative Indicator of Monetary Conditions in China," MPRA Paper 64166, University Library of Munich, Germany.
  14. Körner, Finn Marten & Ehnts, Dirk H., 2013. "Chinese monetary policy – from theory to practice," MPRA Paper 44264, University Library of Munich, Germany.
  15. Hyeongwoo Kim & Wen Shi, 2014. "The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach," Auburn Economics Working Paper Series auwp2014-12, Department of Economics, Auburn University.
  16. repec:hhs:bofitp:2013_007 is not listed on IDEAS
  17. Xiong, Weibo, 2012. "Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis," China Economic Review, Elsevier, vol. 23(3), pages 512-533.
  18. Eric Girardin & Sandrine Lunven & Guonan Ma, 2014. "Inflation and China's monetary policy reaction function: 2002-2013," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 159-170 Bank for International Settlements.

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