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Commitment or discretion? An empirical investigation of monetary policy preferences in China

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  • Liu, Ding
  • Zhang, Yue
  • Sun, Weihong

Abstract

This paper offers a first attempt to estimate the policy preferences of China’s central bank by confronting a small-scale microfounded New Keynesian model in which monetary policy is described by commitment or discretion with the Chinese macroeconomic data over the period from 1992Q2 to 2017Q4. Bayesian model comparison reveals that the data favor discretionary monetary policy. Estimates of the loss function weights under both cases show that the leading policy goal is price stability, followed by output stability and then interest rate smoothing. Finally, through counterfactual analyses we assess how macroeconomic outcomes might improve, had the Chinese central bank been able to commit. These findings shed new light on the opaque Chinese monetary policy, and are robust to subsample analysis.

Suggested Citation

  • Liu, Ding & Zhang, Yue & Sun, Weihong, 2020. "Commitment or discretion? An empirical investigation of monetary policy preferences in China," Economic Modelling, Elsevier, vol. 85(C), pages 409-419.
    • Handle: RePEc:eee:ecmode:v:85:y:2020:i:c:p:409-419
    DOI: 10.1016/j.econmod.2019.11.022
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    3. Kim, Jeong-Yoo & Choi, Hyung Sun, 2023. "Monetary policy, fiscal policy and cross signal jamming," Journal of Macroeconomics, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    Commitment; Discretion; New keynesian model; Optimal monetary policy; China;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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