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Low Inflation, Pass‐through, and a Discrete Inflation‐targeting Framework for Monetary Policy in China

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  • Chengsi Zhang

Abstract

The performance of inflation in China over the past few decades has been remarkable. This paper characterizes the statistical nature of the inflation series in China over the past quarter of a century and presents an interesting scenario of large decline in inflation pass‐through accompanied with low inflation since the end of the 1990s. How should monetary policy in China be conducted under these new economic conditions? We propose a discrete inflation‐targeting framework for monetary policy, which is likely to be suitable for the regime of low inflation and inflation pass‐through. The advantages and caveats of adopting such a framework are also discussed.

Suggested Citation

  • Chengsi Zhang, 2007. "Low Inflation, Pass‐through, and a Discrete Inflation‐targeting Framework for Monetary Policy in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 15(2), pages 59-73, March.
    • Handle: RePEc:bla:chinae:v:15:y:2007:i:2:p:59-73
    DOI: 10.1111/j.1749-124X.2007.00061.x
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    References listed on IDEAS

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    1. Lars E. O. Svensson, 1999. "How should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 195-259.
    2. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    3. Chengsi Zhang & Denise R. Osborn & Dong Heon Kim, 2008. "The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 667-699, June.
    4. Guy Debelle & Miguel A Savastano & Paul R Masson & Sunil Sharma, 1998. "Inflation Targeting as a Framework for Monetary Policy," IMF Economic Issues 15, International Monetary Fund.
    5. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
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    Cited by:

    1. Chengsi Zhang & Hong Pang, 2008. "Excess Liquidity and Inflation Dynamics in China: 1997–2007," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(4), pages 1-15, July.
    2. Zhang, Chengsi & Murasawa, Yasutomo, 2012. "Multivariate model-based gap measures and a new Phillips curve for China," China Economic Review, Elsevier, vol. 23(1), pages 60-70.
    3. Chengsi Zhang, 2009. "Excess Liquidity, Inflation and the Yuan Appreciation: What Can China Learn from Recent History?," The World Economy, Wiley Blackwell, vol. 32(7), pages 998-1018, July.

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