Monetary Policy in China: The Role of the Qualitative Instruments

Abstract

The objective of this paper is to shed some light on the role of the qualitative instruments for monetary policy conduct in China. The unobservable qualitative instruments are calculated by Kalman filtering and then are used in a Taylor rule regression, to estimate if and how they react to inflation and the output gap. The results are compared to the estimates of a classic Taylor rule, with the base interest rate as the monetary policy instrument. Results suggest that qualitative instruments react to the business cycle, but not to inflation, while base interest rate reacts both to inflation and output. As Chinese monetary policy relies more on the qualitative than on the quantitative instruments, People’s Bank of China seems to promote growth primarily through stabilizing output, not inflation.