The Time-varying Zone-like and Asymmetric Preference of Central Banks: Evidence from China

Chuanglian Chen (), Xiaobin Liu (), Jun Yu and Tao Zeng ()
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Chuanglian Chen: Jinan University
Xiaobin Liu: Sun Yat-sen University
Tao Zeng: Zhejiang University

No 202421, Working Papers from University of Macau, Faculty of Business Administration

Abstract: This paper investigates the time-varying asymmetric and zone-like preferences of the People’s Bank of China (PBoC) and its corresponding monetary policy reaction function. We assume that the priority given to different policy objectives in the loss function of the PBoC can evolve over time. Based on this assumption and the economic system, the central bank minimizes losses and derives an optimal forward-looking monetary policy rule with time-varying parameters. The paper explores four distinct types of loss related to inflation, output, and leverage, resulting in a total of 64 distinct models. Leveraging a modified maximum likelihood estimation approach, we estimate these models and utilize the Akaike information criterion (AIC) to identify the most suitable model. Based on the data from 1996 to 2022, we find that: (1) the PBoC’s reaction to inflation differentials exhibits slight asymmetry, featuring a no-intervention zone between -1% and 1%. The monetary authority intervenes when inflation diverges by more than 1% from the target, otherwise relying on market self-regulation; (2) regarding output gaps, the PBoC asymmetrically intervenes, displaying a stronger inclination towards averting overheating compared to downturns; (3) in response to credit leverage differentials, policy reactions follow a linear pattern. The empirical results underscore the central bank’s adaptability and responsiveness to economic fluctuations and strongly demonstrate the flexibility and advantages of our framework.

Keywords: Time-varying parameter model; forward-looking monetary policy rule; leverage; asymmetric and zone-like preference (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 E5 E52 E58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2024-11
New Economics Papers: this item is included in nep-cba, nep-cna and nep-mon
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