A regime-switching approach to estimating the nonlinear quantity-based monetary policy rule in China

Xu Zhang, Xiaoxing Liu, Jianqin Hang and Dengbao Yao

Applied Economics Letters, 2017, vol. 24, issue 2, 132-135

Abstract: This article focuses on the quantity-based monetary policy rule in China. The article applies a Markov regime-switching approach to estimate the nonlinear policy rule using quarterly data from 1997Q1 to 2015Q2. Overall, the performance of the estimated two-state rule is significantly better than the performance of the linear rule. The regime-switching estimation suggests that the quantity-based policy tool displays a countercyclical response to the inflation gap but a pro-cyclical response to the output gap during recessions. In addition, this article provides notable evidence of the fact that China’s central bank has been targeting inflation over the gradual course of financial liberalization.

Date: 2017
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DOI: 10.1080/13504851.2016.1170925

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