What Measures Chinese Monetary Policy?

Abstract

This paper models the PBC’s operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC’s procedures appear to have changed over time. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture of the two. There are a variety of indicators that appear to contain information about the monetary policy stance. It is therefore preferable to use a composite measure to gauge the stance of Chinese monetary policy. We construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with existing indicators suggests that the composite indices, rather than individual indicators, perform better in measuring the stance of Chinese monetary policy.