Bayesian estimation of China's monetary policy transparency: A New Keynesian approach

•A new DSGE model for analyzing monetary policy transparency is established.•China's monetary policy transparency is investigated for the first time.•Cross-country comparisons are conducted for model assessment.•The political economy of China's monetary policy behavior is analyzed.

By constructing a modified version of interest-rate term structure and incorporating it into a micro-founded DSGE model, this paper investigates China's monetary policy transparency as well as its macroeconomic implications by using quarterly data for the period 1992-2013. Empirical results from Bayesian estimation show that, the degree of China's monetary policy transparency is quite low. This conclusion is further confirmed by the actual practice of China's monetary policy in many aspects. From a policy perspective, a two-step monetary policy reform should be adopted by China while it moves toward a market-based macroeconomic framework. First, the independence of the central bank should be strengthened and an explicit inflation targeting regime should be adopted to make inflation under control. Second, a series of institutional arrangements should be established to increase monetary policy transparency in practice.