Abstract
This paper revisits the effectiveness of Chinese monetary policy from augments concerning rational expectations. To estimate the dynamics of expectations, we incorporate market regime switching into the estimation of the rational expectations element using a recursive solution method. When Chinese market-oriented reforms improves the access of agents to market information, we show that (i) agents using available information behave rationally in forming price expectations and (ii) monetary policies in the presence of rational expectations are neutral with respect to real asset price dynamics, even if the market is heavily regulated by the monetary authority.
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