What measures Chinese monetary policy?

•The PBC's operating procedures are analysed in a two-stage vector autoregression framework.•These operating procedures have evolved over time; since about 2006, they have developed to a relatively stable regime.•These operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture.•We construct a new composite indicator of the overall policy stance.

This paper models the PBC's operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC's operating procedures have evolved over time; since about 2006, they have developed to a relatively stable regime. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture. A set of indicators all contain information about the policy stance. Finally, we construct a new composite indicator of the overall policy stance.