Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis

The People's Bank of China (PBC) has employed a range of different instruments in the implementation of its monetary policy over the past decades, so perhaps no single instrument would constitute an adequate representation of the monetary policy stance. We thus develop a new policy stance index, and examine it in an ordered probit model, which follows the studies by Gerlach (2004) and He and Pauwels (2008). The empirical results show that in a backward-looking model, monetary policy reacts to actual output growth; one the other hand, when deviations from trend levels are considered, the PBC concerns inflation most seriously. In a forward-looking model, when we examine the PBC's statements in its quarterly Monetary Policy Executive Report from 2001Q1 to 2010Q3, it seems that the PBC's assessment of the prospects for inflation plays a key role determining the PBC's monetary policy stance. Our conclusions suggest that the PBC is informally targeting inflation, although no explicit target has ever been announced to the public by the PBC.

Research highlights► A new monetary policy stance index is developed for China. ► The index is then examined in an ordered probit model. ► Monetary policy reacts significantly to past output growth. ► Besides, monetary policy responds to deviations of inflation from long-term trend. ► PBC's words in executive reports also suggest an informal inflation targeting regime.