Estimating forward-looking rules for China's Monetary Policy: A regime-switching perspective

Tingguo Zheng, Xia Wang and Huiming Guo

China Economic Review, 2012, vol. 23, issue 1, 47-59

Abstract: This paper introduces a regime-switching forward-looking Taylor rule to describe the monetary policy behavior and considers its estimation using a two-step MLE procedure due to Kim and Nelson (2006), Kim (2009) and Zheng and Wang (2010). By doing an empirical analysis on quarterly data for China over the period 1992–2010, our results show that the actual reactions of China's monetary policy can be well characterized by a two-regime forward-looking Taylor rule. Furthermore, it is also suggested that the interest rate policy in response to inflation and output gap is asymmetric, behaving a significant characteristic of regime-switching nonlinearity. Specifically, in the first regime the People's Bank of China targets inflation, but not focuses on the output gap; while in the second regime the central bank targets the output gap and the policy rule is not a stable framework.

Keywords: Taylor rule; Regime switching; Forward-looking; Monetary policy (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:23:y:2012:i:1:p:47-59

DOI: 10.1016/j.chieco.2011.07.012

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