The Dependence of China’s Monetary Policy Rules on Interest Rate Regimes: Empirical Analysis Based on a Pseudo Output Gap

Abstract

Although a large number of scholars have studied the policy preferences and monetary policy rules of China's central bank, most have found no evidence that China's central bank has adjusted the nominal interest rates against the output gap. By constructing the pseudo output gap defined by the deviation of the real output growth rate and the target growth rate, this paper finds that China's central bank prefers to adjust the nominal interest rates against the pseudo output gap. The monetary policy preferences and rules of China's central bank in different interest rate regimes are investigated based on the threshold Taylor rule model. It is found that, in the high-interest-rate regime, the central bank adjusts the nominal interest against the inflation gap and the pseudo output gap, while in the low-interest-rate regime, there is no evidence that the central bank adjusts the nominal interest rates against the pseudo output gap. The lower bound of interest rate reduction and the weakening of interest rate policy effects caused by the liquidity trap of the interest rate are the possible reasons for China's central bank not to adjust the nominal interest rates against the pseudo output gap.

U.S. Monetary Policy and Herding: Evidence from Commodity Markets

“…Although such monetary rules have been a useful yardstick for assessing monetary policy behavior, policy rates have been away from the level implied by such rules, rendering monetary policy systematically accommodative from the perspective of this benchmark, such as between the early 2000s and the outbreak of the recent global financial crisis (Ahrend et al 2008). Nevertheless, the literature has not reached consensus on this issue (Taylor 2007;Bernanke 2010;Zhang and Pan 2019). Taylor (2010Taylor ( , 2012 argued that the presence of deviations from a standard monetary policy rule reflected a significant change in the policy regime, which he dubbed the "great deviation," albeit this was rejected by Bernanke (2010).…”