Low Inflation, Pass-through, and a Discrete Inflation-targeting Framework for Monetary Policy in China

The performance of inflation in China over the past few decades has been remarkable. This paper characterizes the statistical nature of the inflation series in China over the past quarter of a century and presents an interesting scenario of large decline in inflation pass-through accompanied with low inflation since the end of the 1990s. How should monetary policy in China be conducted under these new economic conditions? We propose a discrete inflation-targeting framework for monetary policy, which is likely to be suitable for the regime of low inflation and inflation pass-through. The advantages and caveats of adopting such a framework are also discussed. Copyright 2007 Institute of World Economics and Politics, Chinese Academy of Social Sciences.