China's Monetary Policy Communication: Frameworks, Impact, and Recommendations

The recent update of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. We employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that co‐movements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline dynamic stochastic general equilibrium (DSGE) model that can be solved analytically and allows tracing of the expansionary and contractionary on‐and‐off phases of Chinese monetary policy.

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“…This min–max scaling facilitates comparison with other indicators in the literature (e.g., Sun, 2018; McMahon et al ., 2018).…”

Section: Set‐up Of the Dynamic Factor Modelmentioning

confidence: 99%

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach^*

Funke

Tsang²

2020

Economic Record

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“…Considerable scope remains to: (1) clarify the objectives of monetary policy and how the policy instruments relate to those objectives, (2) publish macroeconomic forecasts regularly, and provide information about the framework and models used, and (3) publish policy communications simultaneously in English, given the growing global integration of Chinese financial markets. Regular press conferences and a regular schedule of MPC meetings at which most policy interest rate decisions are made would be helpful (see McMahon et al 2018).…”

Section: Policy Recommendationsmentioning

confidence: 99%

China's Evolving Exchange Rate Regime

Das

2019

IMF Working Papers

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China's exchange rate regime has undergone gradual reform since the move away from a fixed exchange rate in 2005. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with de jure floating currencies. Allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate, are important steps to build on the progress already made. This should be complemented by further steps to develop the FX market, improve FX risk management, and modernize the monetary policy framework. JEL Classification Numbers: F31, F33, G15, O16, N20

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“…Gaggl et al (2010) emphasize that the the analysis should be conducted for particular monetary policy phases such as the period when the Taylor rule gap is at least 25 or 50 basis points instead of a quarter-toquarter change. Gambacorta (2009) and Maddaloni and Peydró (2011) also emphasized 14 A comprehensive review of China's monetary policy framework can be found in McMahon et al (2018) andHuang et al (2019). 15 Here the open market operation includes the traditional repurchase and reverse repurchase, and the newly introduced instruments such as Medium-term Lending Facility(MLF), Short-term Liquidity Operations(SLO) and Pledged Supplemental Lending(PSL).…”

Section: Monetary Policy Environment and P2p Industrymentioning

confidence: 99%

What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?

Huang

Wang

2019

SSRN Journal

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This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.The risk-taking channel of monetary policy has attracted more attention since the global financial crisis. A low interest rate and lax monetary environment have been accused of giving rise to the higher risk preference of financial institutions, which was at the root of the financial tsunami (Adrian . This channel, if it holds true, implies that monetary policy goes far beyond the traditional impact on price stability and economic growth; it also has implications for systemic risk and financial stability (Borio and White 2004, Issing 2003, Smets et al. 2014, Stein 2012. Expansionary monetary policy can result in the increase of credit quantity (Gambacorta and Marques-Ibanez 2011, Kashyap and Stein 2000) as well as the decrease in credit quality Zhu 2012, Jiménez et al. 2014). Therefore, the relationship between monetary policy and macroprudential management becomes more convoluted and challenges the policymakers. The answers to the question of whether and how monetary policy affects risk-taking are pivotal to the policy discussion and of great academic interest.This paper studies the risk-taking channel of monetary policy based on the evidence from peer-to-peer (P2P, henceforth) lending. Specifically, we intend to answer the following three questions. First, whether the P2P platform's risk tolerance increases through higher probabilities and larger loan amounts to riskier borrowers when monetary policy eases. Second, what is the mechanism behind the risk-taking channel. In particular, this study investigates whether the search-for-yield and funding liquidity play a role in the risk-taking channel. Third, the tightening of regulation policy for the P2P industry in China provides a good experiment to study whether the financial regulation policies can curb the increased risk-taking during the expansionary monetary policy period.Using loan application-level data, we establish new evidence for the risk-taking channel of monetary policy. The main findings are threefold. To begin, a financial institution tends to take more risks when monetary policy eases by lending to riskier borrowers. Meanwhile, the impact of the increased funding liquidity in the liability side on risktaking is ambiguous. In addition, stricter regulation is effectiv...

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China's Monetary Policy Communication: Frameworks, Impact, and Recommendations

Cited by 18 publications

References 13 publications

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach^*

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach^*

China's Evolving Exchange Rate Regime

What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?

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China's Monetary Policy Communication: Frameworks, Impact, and Recommendations

Cited by 18 publications

References 13 publications

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach*

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach*

China's Evolving Exchange Rate Regime

What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?

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Product

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The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach^*

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach^*