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.