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China's Monetary Policy Communication: Money Markets not only Listen, They also Understand

Alicia Garcia-Herrero and Eric Girardin ()
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Alicia Garcia-Herrero: Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research

Authors registered in the RePEc Author Service: Alicia Garcia Herrero ()

No 22013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People's Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China's money markets not only listen to the PBoC's words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC's governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China's money markets.

Keywords: China Monetary Policy Communication; Money Market (search for similar items in EconPapers)
JEL-codes: E52 E58 E43 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-02
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-tra
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