Monetary policy based on nonlinear quantity rule: Evidence from China

- A nonlinear quantity-based monetary policy rule is developed.
- A DSGE model is constructed to investigate nonlinearity in monetary policy.
- Nonlinearity in China's monetary policy is investigated for the first time.
- A significant policy regime shift is identified over the sample period.
- Simulation analysis and model comparisons are conducted and discussed.

This paper investigates nonlinearities in a quantity-based monetary policy rule for China within a New Keynesian DSGE model. Empirical results from Bayesian estimation show that the central bank of China has adopted a nonlinear quantity rule over the period of 1992Q1-2013Q3. Moreover, evidence from sub-period estimation further indicates that there is a significant policy regime shift leading towards a more strict inflation targeting regime during 1999Q1-2013Q3. From a policy perspective, the nonlinear quantity rule proposed in this paper provides us with a useful tool for describing and analyzing monetary policies in emerging market economies.