Asymmetries in multi-target monetary policy rule and the role of uncertainty: Evidence from China

Abstract

Have monetary policies asymmetrically responded to targets besides output and inflation? Multiple targets have been found to exist for monetary authority, and uncertainty is having a growing impact on monetary policy in China. Using the nonlinear autoregressive distribution lag (NARDL) model and data from China from 2001Q1–2022Q3, we build a multi-target monetary policy rule with uncertainty and verify the monetary authority’s asymmetric reactions to the exchange rate, housing price, and uncertainty. Specifically, the Monetary authority of China responds more to a decline than increase in the output gap, and responds more to an increase than decrease in the inflation gap, exchange rate gap, housing price gap, and uncertainty. This practice supports the view of expanding the targets of the Taylor rule, while also providing innovative ideas for asymmetric monetary policy responses for countries with an economic structure or population density comparable to China.