Disinflation costs in China and monetary policy regimes

Maria Ferrara, Antonio Garofalo and Massimiliano Agovino

Economic Modelling, 2020, vol. 93, issue C, 586-594

Abstract: This paper investigates the real effects of a disinflationary policy in China, in which we conduct a disinflation experiment in a medium-scale New Keynesian model. We highlight two key features of China's economy: the relevance of money to monetary policy rules and household inequality. For the former, we consider two monetary policy regimes: an expanded Taylor rule with money and a money supply rule. For the latter, we take into account a share of the population that is limited in its ability to participate in assets markets. Our analysis suggests that a disinflation policy is more costly when the central bank controls the money supply than the case in which the nominal interest rate is the policy instrument. Our results are driven by the different impacts of disinflation on nominal and real interest rates under the two regimes.

Keywords: China; Disinflation; DSGE modelling; Monetary policy; LAMP assumption (search for similar items in EconPapers)
JEL-codes: E31 E43 E51 E52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:93:y:2020:i:c:p:586-594

DOI: 10.1016/j.econmod.2020.09.004

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