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China's Monetary Policy Communication: Money Markets not only Listen, They also Understand

Author

Listed:
  • Alicia Garcia-Herrero

    (Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research)

  • Eric Girardin

    (Aix-Marseille University and French National Center for Scientific Research (CNRS) and ˆ[cole des Hautes ˆ[tudes en Sciences Sociales (EHESS) and Hong Kong Institute for Monetary Research)

Abstract

Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People's Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China's money markets not only listen to the PBoC's words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC's governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China's money markets.

Suggested Citation

  • Alicia Garcia-Herrero & Eric Girardin, 2013. "China's Monetary Policy Communication: Money Markets not only Listen, They also Understand," Working Papers 022013, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:022013
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    Cited by:

    1. Miao Han, 2012. "The People's Bank of China during the global financial crisis: policy responses and beyond," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 10(4), pages 361-390, August.
    2. 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.
    3. Eric Girardin & Sandrine Lunven & Guonan Ma, 2017. "China's evolving monetary policy rule: from inflation-accommodating to anti-inflation policy," BIS Working Papers 641, Bank for International Settlements.
    4. Bradley Jones & Joel Bowman, 2019. "China's Evolving Monetary Policy Framework in International Context," RBA Research Discussion Papers rdp2019-11, Reserve Bank of Australia.
    5. Donato Masciandaro & Davide Romelli, 2016. "From Silence to Voice: Monetary Policy, Central Bank Governance and Communication," BAFFI CAREFIN Working Papers 1627, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy and financial markets: evidence from Twitter traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Bennani, Hamza, 2019. "Does People's Bank of China communication matter? Evidence from stock market reaction," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    8. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
    9. repec:zbw:bofitp:2019_009 is not listed on IDEAS
    10. Sun, Rongrong, 2020. "Monetary policy announcements and market interest rates’ response: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 113(C).
    11. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy, Twitter and financial markets: evidence from social media traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    12. Jeannine Bailliu & Xinfen Han & Barbara Sadaba & Mark Kruger, 2021. "Chinese Monetary Policy and Text Analytics: Connecting Words and Deeds," Staff Working Papers 21-3, Bank of Canada.
    13. Sun, Rongrong, 2015. "What measures Chinese monetary policy?," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 263-286.
    14. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2020. "Tweeting on Monetary Policy and Market Sentiments: The Central Bank Surprise Index," BAFFI CAREFIN Working Papers 20134, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    15. Michael McMahon & Mr. Alfred Schipke & Xiang Li, 2018. "China’s Monetary Policy Communication: Frameworks, Impact, and Recommendations," IMF Working Papers 2018/244, International Monetary Fund.

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    More about this item

    Keywords

    China Monetary Policy Communication; Money Market;

    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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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