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The Time-varying Zone-like and Asymmetric Preference of Central Banks: Evidence from China

Author

Listed:
  • Chuanglian Chen

    (Jinan University)

  • Xiaobin Liu

    (Sun Yat-sen University)

  • Jun Yu

    (University of Macau)

  • Tao Zeng

    (Zhejiang University)

Abstract

This paper investigates the time-varying asymmetric and zone-like preferences of the People’s Bank of China (PBoC) and its corresponding monetary policy reaction function. We assume that the priority given to different policy objectives in the loss function of the PBoC can evolve over time. Based on this assumption and the economic system, the central bank minimizes losses and derives an optimal forward-looking monetary policy rule with time-varying parameters. The paper explores four distinct types of loss related to inflation, output, and leverage, resulting in a total of 64 distinct models. Leveraging a modified maximum likelihood estimation approach, we estimate these models and utilize the Akaike information criterion (AIC) to identify the most suitable model. Based on the data from 1996 to 2022, we find that: (1) the PBoC’s reaction to inflation differentials exhibits slight asymmetry, featuring a no-intervention zone between -1% and 1%. The monetary authority intervenes when inflation diverges by more than 1% from the target, otherwise relying on market self-regulation; (2) regarding output gaps, the PBoC asymmetrically intervenes, displaying a stronger inclination towards averting overheating compared to downturns; (3) in response to credit leverage differentials, policy reactions follow a linear pattern. The empirical results underscore the central bank’s adaptability and responsiveness to economic fluctuations and strongly demonstrate the flexibility and advantages of our framework.

Suggested Citation

  • Chuanglian Chen & Xiaobin Liu & Jun Yu & Tao Zeng, 2024. "The Time-varying Zone-like and Asymmetric Preference of Central Banks: Evidence from China," Working Papers 202421, University of Macau, Faculty of Business Administration.
  • Handle: RePEc:boa:wpaper:202421
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    More about this item

    Keywords

    Time-varying parameter model; forward-looking monetary policy rule; leverage; asymmetric and zone-like preference;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • 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

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