The direction and intensity of China's monetary policy conduct: A dynamic factor modelling approach

Michael Funke and Andrew Tsang

No 8/2019, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: The recent upgrade of the People's Bank of China's monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China's monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.

Keywords: China; monetary policy stance; dynamic factor model; DSGE model (search for similar items in EconPapers)
JEL-codes: C54 E32 E52 E58 E61 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2019_008

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