Abstract:
This paper constructs a forward-looking monetary policy reaction model with expectations both in inflation and output. Using survey data of professionals’ expectations in China from 2001 to 2015, this paper investigates the reaction mechanism of China monetary policy on economic output and inflation rate. The empirical results suggest that the nature of dynamics is very different in quantitative and price-based policy reaction functions, whereas the degree of policy smoothness is similar. The forward-looking behavior of monetary policy mainly reflects in inflation expectations while there is no significant reaction in the output expectations. In addition, the central bank adjustment is countercyclical to inflation expectations but procyclically to output. This asymmetric reaction indicates that the central bank of China prefers low inflation but high economic growth.
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