Chinese monetary policy is not yet well understood by the outside world. This is likely due to the complex nature of China’s monetary policy framework and the lack of independence of its central bank. The People’s Bank of China (PBOC) has multiple objectives and uses several monetary policy instruments whose importance has changed over time. This makes it challenging to infer the systematic patterns of the PBOC monetary policy from its observed behaviour.
Information provided through official PBOC documents can help us better understand Chinese monetary policy actions. In this paper, we use a novel approach to estimate the monetary policy reaction function for China. First, we use econometric techniques to estimate the missing component in a standard monetary policy rule for China. We then use text analytics to extract and interpret the information content of official PBOC documents. Finally, we use our findings from the text analytics to accurately interpret the missing component identified in our first step.
Our results suggest that the missing component is related to the government‘s supply-side structural reform agenda. This suggests that the PBOC uses monetary policy as a tool to achieve the government’s structural reform objectives. Our structural analysis supports these findings by providing evidence of the importance of government‘s supply-side reform objectives for monetary policy conduct and macroeconomic outcomes.