New Evidence on the PBoC's Reaction Function

Makram El-Shagi and Yishuo Ma ()
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Yishuo Ma: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan

No 2024/5, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: While policy reaction functions of most major central banks are routinely approximated by fitting Taylor (type) rules to their policy rate, there is no such consensus for the People's Bank of China (PBoC). What makes it hard to get a clear impression of the “true†reaction function is that most papers in the extensive literature focus on a single aspect of the reaction function typically mostly comparing it to one (or a few) widely used baseline models. Contrarily, we assess a broad range of questions regarding the reaction function in a unified approach, estimating several hundred reaction functions. While we find that no single policy measure fully captures all aspects of the PBoC's policy, our paper provides clear evidence for asymmetric behavior, support for an important role of monetary aggregates, and robust evidence for the PBoC considering both financial stability and exchange rate stabilization in its policy deliberations.

Keywords: China; monetary policy; reaction function; Taylor rule (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cna, nep-fdg and nep-mon
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