“To guide or not to guide? Quantitative monetary policy tools and macroeconomic dynamics in China”

“To guide or not to guide? Quantitative monetary policy tools and macroeconomic dynamics in China”

Hongyi Chen, Michael Funke, Ivan Lozev and Andrew Tsang

BOFIT Discussion Papers 3/2017

This paper discusses the macroeconomic effects of China’s informal banking regulatory tool “win-dow guidance,” introduced in 1998. Using an open-economy DSGE model that includes the com-mercial banking sector, we study the stabilizing effects of this non-standard quantitative monetary policy tool and the implications of quantity-based vs. price-based monetary policy instruments for welfare. The analyses are relevant to the current overhaul of Chinese monetary policy.