DP 2024/5 - El-Shagi, M. / Ma, Y.: New Evidence on the PBoC’s Reaction Function

Makram El-ShagiYishuo Ma

CFDS Discussion Paper 2024/5


While policy reaction functions of most major central banks are routinely approximated by fitting Taylor (type) rules to their policy rate, there is no such consensus for the People’s Bank of China (PBoC). What makes it hard to get a clear impression of the “true” reaction function is that most papers in the extensive literature focus on a single aspect of the reaction function typically mostly comparing it to one (or a few) widely used baseline models. Contrarily, we assess a broad range of questions regarding the reaction function in a unified approach, estimating several hundred reaction functions. While we find that no single policy measure fully captures all aspects of the PBoC’s policy, our paper provides clear evidence for asymmetric behavior, support for an important role of monetary aggregates, and robust evidence for the PBoC considering both financial stability and exchange rate stabilization in its policy deliberations.

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