Is the People's Bank of China consistent in words and deeds?

Abstract

The People's Bank of China (PBC) now frequently uses communication as a policy tool. Whether its words are consistent with its deeds is important for the public to understand the PBC's complex behavior. In this paper, we employ a supervised learning model to construct monetary policy (MP) and economic outlook (EC) communication indices based on the outlook section of quarterly China Monetary Policy Reports (MPRs). We find that the PBC not only adjusts its interventions according to the corresponding economic situation, but also takes into account the information released in the previous outlook section, which indicates its consistency in words and deeds. Using a time-varying parameter model, we further find that the PBC's consistency of words and deeds has made progress over time. The PBC tends to be more consistent in words and deeds under higher uncertainty, and the improvement of such consistency can significantly decrease disagreement about inflation expectations. An additional analysis shows that the full text of MPRs can help predict future monetary policies on a longer time horizon.