China's monetary policy and the exchange rate

Mehrotra, Aaron and Sanchez-Fung, Jose (2010) China's monetary policy and the exchange rate. (Discussion Paper) Helsinki, Finland : Bank of Finland. 25 p. (BOFIT Discussion Papers, no. 10/2010) ISBN 9789524626859

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The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.

Item Type: Monograph (Discussion Paper)
Uncontrolled Keywords: exchange rate, hybrid McCallum-Taylor monetary policy reaction function, SVAR, survey-based inflation expectations, China, E42, E52,
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences (until 2017) > School of Economics (until November 2012)
Depositing User: Susan Miles
Date Deposited: 07 Sep 2010 17:39
Last Modified: 16 Jul 2012 21:49

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