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Monetary policy rule under financial deregulation in China

Author

Listed:
  • Yucheng Cai

    (Saitama University, Japan)

  • Hiroyuki Taguchi

    (Saitama University, Japan)

Abstract

This paper examines the monetary policy rule in practice for China during the period from 1998Q1 to 2014Q2 by applying the Taylor rule and by estimating policy reaction functions. The analysis would be significant since during that period the monetary-policy instruments and targets have been more market-oriented in accordance with the progress in financial deregulation. The findings can be summarized as follows. First, the recent policy rule since 2003 has become synchronizing with the Taylor rule. Second, the response of policy-target interest rate to inflation, though identified in policy reaction functions, has been weak enough to accommodate changes in inflation, probably because the excess-reserve operation as another policy-target has worked together to respond to inflation. Third, the response to output gap has been robust in the backward-looking specification. Fourth, the response to exchange rate has been insignificant probably due to imperfect capital mobility and an increase in exchange rate flexibility.

Suggested Citation

  • Yucheng Cai & Hiroyuki Taguchi, 2015. "Monetary policy rule under financial deregulation in China," Economics Bulletin, AccessEcon, vol. 35(1), pages 122-132.
    • Handle: RePEc:ebl:ecbull:eb-14-00958
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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I1-P14.pdf
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    References listed on IDEAS

    as
    1. Hiroyuki Taguchi & Chizuru Kato, 2011. "Assessing the performance of inflation targeting in East Asian economies," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 25(1), pages 93-102, May.
    2. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Matías Vernengo (ed.), Monetary Integration and Dollarization, chapter 8, Edward Elgar Publishing.
    3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    4. Soyoung Kim & Yung Chul Park, 2006. "Inflation targeting in Korea: a model of success?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 140-164, Bank for International Settlements.
    5. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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    Cited by:

    1. Liu Kerry, 2019. "Some Preliminary Evidence on China’s New Monetary Policy Tool: The Standing Lending Facility," Review of Economics, De Gruyter, vol. 70(2), pages 137-155, August.

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    More about this item

    Keywords

    Monetary policy rule; financial deregulation; China; Taylor rule; policy reaction functions;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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