Testing Commitment Models of Monetary Policy in China

Yafang Yu ()
Additional contact information
Yafang Yu: School of Finance, Nankai University, Tianjin 300071, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2016, vol. 11, issue 4, 668-693

Abstract: In the past decade Chinese inflation was not high on average, but it was quite volatile. Back in the 1980s and 1990s, high inflation was a very real problem. What explains the inflationary dynamics in China? In particular, does monetary policy account for the substantial run-ups of inflation, followed by the equally substantial dis-inflation? In the absence of commitment technologies, the monetary authorities may create surprise inflation to achieve higher growth, while private agents would anticipate that and adjust their decisions accordingly, leading to accelerated inflation without a real impact. Do these types of simple time-inconsistency models of monetary policy explain the dynamic pattern of inflation in China? I show that the long-run and short-run restrictions imposed by discretionary policy, when the time-inconsistent policymaker has a desire to push output above potential, are largely rejected by the data. The estimates of the inflation bias under discretion when the policymaker is asymmetrically averse to recessions are not statistically significant either. The analysis contributes to the understanding of Chinese monetary policy and its inflationary implications and also points to the need of further investigation of inflationary behavior during the economic transition.

Keywords: inflation; output; monetary policy; time-inconsistency; China (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations:

Downloads: (external link)
http://journal.hep.com.cn/fec/EN/10.3868/s060-005-016-0033-0 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:11:y:2016:i:4:p:668-693

Access Statistics for this article

Frontiers of Economics in China-Selected Publications from Chinese Universities is currently edited by LONG Jie

More articles in Frontiers of Economics in China-Selected Publications from Chinese Universities from Higher Education Press
Bibliographic data for series maintained by Frank H. Liu ().