Words or Actions?—The optimal monetary policy communication in China
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| Title | Words or Actions?—The optimal monetary policy communication in China
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| Author | Lu Zhen and Lin Bingxuan |
| Organization | School of Finance, Zhongnan University of Economics and Law;College of Business Administration, University of Rhode Island |
| Email | mluzhen@yahoo.com.cn；blin@uri.edu |
| Key Words | Optimal Communication; Monetary Policy; Bounded Rationality |
| Abstract | This paper incorporates bounded rationality in a simple New Keynesian model to investigate the optimal communication. The model gives the conditions for central bank communication. It also describes the characteristics of optimal communication signals. Because the China’s economy is government-dominated, we show that conditions for communication are easily satisfied and the effect of the communication is more significant in China, so the central bank of China should pay more attention to communication. Using Chinese data, we empirically show that the effect of monetary policy communication is positively related to the supply shock, the consistency between implementation and communication of monetary policy and the inflation. This result supports our analysis. |
| Serial Number | WP280 |
| Time | 2012-07-13 |
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