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

Dong He and Laurent Pauwels

No 806, Working Papers from 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.

Keywords: Monetary policy; People's Bank of China; qualitative response models; large factor models (search for similar items in EconPapers)
JEL-codes: C25 C32 E52 E58 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-cna, nep-dcm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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