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Frontiers of Economics in China

Front. Econ. China    2016, Vol. 11 Issue (4) : 668-693     DOI: 10.3868/s060-005-016-0033-0
Orginal Article |
Testing Commitment Models of Monetary Policy in China
Yafang Yu()
School of Finance, Nankai University, Tianjin 300071, China
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In the past decade Chinese inflation was not high on average, but it was quite volatile. Back in the 1980s and 1990s, high inflation was a very real problem. What explains the inflationary dynamics in China? In particular, does monetary policy account for the substantial run-ups of inflation, followed by the equally substantial dis-inflation? In the absence of commitment technologies, the monetary authorities may create surprise inflation to achieve higher growth, while private agents would anticipate that and adjust their decisions accordingly, leading to accelerated inflation without a real impact. Do these types of simple time-inconsistency models of monetary policy explain the dynamic pattern of inflation in China? I show that the long-run and short-run restrictions imposed by discretionary policy, when the time-inconsistent policymaker has a desire to push output above potential, are largely rejected by the data. The estimates of the inflation bias under discretion when the policymaker is asymmetrically averse to recessions are not statistically significant either. The analysis contributes to the understanding of Chinese monetary policy and its inflationary implications and also points to the need of further investigation of inflationary behavior during the economic transition.

Keywords inflation      output      monetary policy      time-inconsistency      China     
Issue Date: 20 January 2017
 Cite this article:   
Yafang Yu. Testing Commitment Models of Monetary Policy in China[J]. Front. Econ. China, 2016, 11(4): 668-693.
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