IDEAS home Printed from https://ideas.repec.org/p/hkm/wpaper/022013.html
   My bibliography  Save this paper

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

Author

Listed:
  • Alicia Garcia-Herrero

    (Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research)

  • Eric Girardin

    (Aix-Marseille University and French National Center for Scientific Research (CNRS) and ˆ[cole des Hautes ˆ[tudes en Sciences Sociales (EHESS) and 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.

Suggested Citation

  • Alicia Garcia-Herrero & Eric Girardin, 2013. "China's Monetary Policy Communication: Money Markets not only Listen, They also Understand," Working Papers 022013, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:022013
    as

    Download full text from publisher

    File URL: http://www.hkimr.org/uploads/publication/347/wp-no-02_2013-final-.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Ellis Connolly & Marion Kohler, 2004. "News and Interest Rate Expectations: A Study of Six Central Banks," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
    3. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    4. Mr. Nathan Porter & Ms. TengTeng Xu, 2009. "What Drives China’s Interbank Market?," IMF Working Papers 2009/189, International Monetary Fund.
    5. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    7. Alicia Garcia-Herrero & Eli M. Remolona, 2008. "Managing expectations by words and deeds: Monetary policy in Asia and the Pacific," Working Papers 0802, BBVA Bank, Economic Research Department.
    8. Li, Xiao-Ming & Zou, Li-Ping, 2008. "How do policy and information shocks impact co-movements of China's T-bond and stock markets?," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 347-359, March.
    9. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-783, August.
    10. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    11. Rosa, Carlo & Verga, Giovanni, 2007. "On the consistency and effectiveness of central bank communication: Evidence from the ECB," European Journal of Political Economy, Elsevier, vol. 23(1), pages 146-175, March.
    12. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
    13. Fan, Longzhen & Zhang, Chu, 2007. "Beyond segmentation: The case of China's repo markets," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 939-954, March.
    14. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 509-541, March.
    15. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range‐Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, June.
    16. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
    17. Marie Musard-Gies, 2005. "Do ECB's statements steer short-term and long-term interest rates in the euro zone?," Money Macro and Finance (MMF) Research Group Conference 2005 56, Money Macro and Finance Research Group.
    18. Fan, Longzhen & Johansson, Anders C., 2010. "China's official rates and bond yields," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 996-1007, May.
    19. repec:pri:cepsud:161blinder is not listed on IDEAS
    20. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    21. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    22. Reeves, Rachel & Sawicki, Michael, 2007. "Do financial markets react to Bank of England communication?," European Journal of Political Economy, Elsevier, vol. 23(1), pages 207-227, March.
    23. Boschen, John F & Mills, Leonard O, 1995. "The Relation between Narrative and Money Market Indicators of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 24-44, January.
    24. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
    25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    26. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bennani, Hamza, 2019. "Does People's Bank of China communication matter? Evidence from stock market reaction," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    2. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
    3. Miao Han, 2012. "The People's Bank of China during the global financial crisis: policy responses and beyond," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 10(4), pages 361-390, August.
    4. repec:zbw:bofitp:2019_009 is not listed on IDEAS
    5. Sun, Rongrong, 2020. "Monetary policy announcements and market interest rates’ response: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 113(C).
    6. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy, Twitter and financial markets: evidence from social media traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Eric Girardin & Sandrine Lunven & Guonan Ma, 2014. "Inflation and China's monetary policy reaction function: 2002-2013," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 159-170, Bank for International Settlements.
    8. Eric Girardin & Sandrine Lunven & Guonan Ma, 2017. "China's evolving monetary policy rule: from inflation-accommodating to anti-inflation policy," BIS Working Papers 641, Bank for International Settlements.
    9. Jeannine Bailliu & Xinfen Han & Barbara Sadaba & Mark Kruger, 2021. "Chinese Monetary Policy and Text Analytics: Connecting Words and Deeds," Staff Working Papers 21-3, Bank of Canada.
    10. Sun, Rongrong, 2015. "What measures Chinese monetary policy?," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 263-286.
    11. Bradley Jones & Joel Bowman, 2019. "China's Evolving Monetary Policy Framework in International Context," RBA Research Discussion Papers rdp2019-11, Reserve Bank of Australia.
    12. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2020. "Tweeting on Monetary Policy and Market Sentiments: The Central Bank Surprise Index," BAFFI CAREFIN Working Papers 20134, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy and financial markets: evidence from Twitter traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    14. Michael McMahon & Mr. Alfred Schipke & Xiang Li, 2018. "China’s Monetary Policy Communication: Frameworks, Impact, and Recommendations," IMF Working Papers 2018/244, International Monetary Fund.
    15. Donato Masciandaro & Davide Romelli, 2016. "From Silence to Voice: Monetary Policy, Central Bank Governance and Communication," BAFFI CAREFIN Working Papers 1627, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alicia Garcia-Herrero & Eric Girardin & Arnoldo Lopez Marmolejo, 2015. "Mexico’s monetary policy communication and money markets," Working Papers 1515, BBVA Bank, Economic Research Department.
    2. Alicia Garcia-Herrero & Eric Girardin & Enestor Dos Santos, 2015. "Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets," Working Papers 1512, BBVA Bank, Economic Research Department.
    3. Alicia Garcia-Herrero & Eric Girardin & Arnoldo Lopez-Marmolejo, 2019. "Mexico¡¯s Monetary Policy Communication and Money Markets," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(2), pages 81-97, February.
    4. Picault, Matthieu & Renault, Thomas, 2017. "Words are not all created equal: A new measure of ECB communication," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 136-156.
    5. Ancil Crayton, 2018. "Central Bank Communication and the Yield Curve: A Semi-Automatic Approach using Non-Negative Matrix Factorization," Papers 1809.08718, arXiv.org.
    6. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    7. Jakob Haan, 2008. "The effect of ECB communication on interest rates: An assessment," The Review of International Organizations, Springer, vol. 3(4), pages 375-398, December.
    8. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    9. da Costa Filho, Adonias Evaristo & Rocha, Fabiana, 2009. "Communication, transparency, monetary policy index, central bank watching," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 63(4), December.
    10. Monique Reid & Stan Du Plessis, 2010. "Loud And Clear? Can We Hear When The Sarb Speaks?," South African Journal of Economics, Economic Society of South Africa, vol. 78(3), pages 269-286, September.
    11. Rodolfo Tomás Da Fonseca Nicolay & Gabriel Caldas Montes, 2014. "Comunicação Do Banco Central,Expectativas De Inflação E Profecia Auto-Realizável: Evidências Para Obrasil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 046, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    12. García-Herrero, Alicia & Girardin, Eric & dos Santos, Enestor, 2017. "Do as I do, and also as I say: monetary policy impact on Brazil’s financial markets," LSE Research Online Documents on Economics 123395, London School of Economics and Political Science, LSE Library.
    13. Juan Galvis & Claudio de Moraes & Juan Anzoátegui, 2017. "Effects of monetary policy announcements on exchange rate volatility: an analysis for Colombia, 2008-2015," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 87, pages 67-95, Julio - D.
    14. Thiago Cacicedo Cidad & Gabriel Caldas Montes, 2016. "Does Central Bank’S Perception Regarding The State Of The Economy Affect Entrepreneurs’ Expectations? Are Entrepreneurs’ Expectations Important For Investment? Empirical Evidence From Brazil," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    15. Galvis Ciro, Juan Camilo & Oliveira de Moraes, Claudio & Anzoátegui Zapata, Juan Camilo, 2017. "Efectos de los anuncios de política monetaria sobre la volatilidad de la tasa de cambio: un análisis para Colombia, 2008-2015," Revista Lecturas de Economía, Universidad de Antioquia, CIE, issue 87, pages 67-95, March.
    16. Alicia Garcia-Herrero & Eric Girardin & Hermann Gonzalez, 2017. "Analyzing the Impact of Monetary Policy on Financial Markets in Chile," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 32(1), pages 3-21, April.
    17. Freddy H. CASTRO, 2012. "Senales de política monetaria y movimientos en la estructura a plazo de la tasa de interés en Colombia," Archivos de Economía 9908, Departamento Nacional de Planeación.
    18. Alan S. Blinder, 2008. "Talking about Monetary Policy: The Virtues (and Vices?) of Central Bank Communication," Working Papers 1048, Princeton University, Department of Economics, Center for Economic Policy Studies..
    19. Alan S. Blinder, 2008. "Talking about Monetary Policy: The Virtues (and Vices?) of Central Bank Communication," Working Papers 1048, Princeton University, Department of Economics, Center for Economic Policy Studies..
    20. Gabriel Caldas Montes & Rodolfo Tomás da Fonseca Nicolay, 2015. "Central bank’s perception on inflation and inflation expectations of experts," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 1142-1158, November.

    More about this item

    Keywords

    China Monetary Policy Communication; Money Market;

    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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:022013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: HKIMR (email available below). General contact details of provider: https://edirc.repec.org/data/hkimrhk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.