Hawk or dove: Switching regression model for the monetary policy reaction function in China

• This paper investigates the monetary policy reaction function in China.
• PBC is consistent with the “hawk regime hypothesis” in a high-price regime.
• PBC is consistent with the “dove regime hypothesis” in a low-price regime.
• The likelihood of being in a high-price regime varies relatively to the macroeconomic shock and further to the switching of the monetary policy.

This paper investigates the monetary policy reaction function in China. We propose two hypotheses, namely, the “hawk regime” and the “dove regime” hypotheses. The former suggests that the central bank is more concerned about the inflation rate than the output, whereas the latter suggests otherwise. We examine these hypotheses using the endogenous switching model of Hu and Schiantarelli (1998), which allows the creation of a threshold index that divides the sample into two high and low price regimes on the basis of the inflation and asset price growth rates. The People's Bank of China places a low value on output and a high coefficient on inflation in a “high-price regime” and vice versa in a “low-price scheme,” which are consistent with the hawk and dove regime hypotheses, respectively.