Monetary Policy Uncertainty in China

Abstract

In this paper, we study the measurement and the consequences of monetary policy uncertainty in China. We propose a new measure of uncertainty about the monetary policy of the People’s Bank of China (PBOC). The uncertainty index is extracted from the reporting about the PBOC’s monetary policy in international newspapers. We show that a shock to Chinese monetary policy uncertainty has significant effects on real economic activity, investment and asset prices in mainland China. Moreover, this shock has spillover effects on other Asian economies, leading to a fall in asset prices and GDP. Particularly, an increase in uncertainty leads to a drop in stock prices throughout the region. Hence, uncertainty about the PBOC’s monetary policy is an additional channel of transmission that coexists with the transmission of the PBOC monetary policy itself. Finally, we show that our index contains information over and above what is already incorporated in monetary policy uncertainty indices based on mainland newspapers.