The direction and intensity of China’s monetary policy conduct : A dynamic factor modelling approach

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Title: The direction and intensity of China’s monetary policy conduct : A dynamic factor modelling approach
ISBN: 978-952-323-271-6
Author: Funke, Michael ; Tsang, Andrew
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
ISSN: 1456-5889
Series year: 2019
Series number: 8/2019
Year of publication: 2019
Publication date: 24.4.2019
Pages: 37
Subject (yso): rahapolitiikka
Keywords: Bofit-kokoelma; Kiina; DSGE; mallit
JEL: C54; E52; E58; E61; E32
Other keywords: China; monetary policy stance; dynamic factor model; DSGE model
Abstract: The recent upgrade of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.
Table of contents: Abstract ..4 1 Introduction ..5 2 The evolution of China’s multiple instrument monetary framework ..6 3 Setup of the dynamic factor model ..9 3.1 Methodology ..9 3.2 Data description and results ..12 3.3 Assessment of the monetary policy stance indicator against various benchmarks ..18 4 Temporal evolution of monetary policy through the lens of a DSGE model ..21 5 Conclusions ..30 References ..32 Appendix A Parameter estimates of dynamic factor model of monetary policy stance indicator ..35 Appendix B Replication of monetary policy shocks described in Kamber and Mohanty (2018) ..36

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