Abstract: Many previous studies indicate that the central bank doesn’t adjust the nominal interest rate based on the output gap measured by the filtering method, which makes the desirability of the traditional output gap questionable. In view of this, this article constructs a “pseudo-output gap” based on the economic connotation of output gap, and captures the real interest rate operation of the central bank based on different preference assumptions. It finds that: Firstly, the Taylor rule based on the pseudo-output gap can better capture the policy intention of the central bank. It means the central bank prefers countercyclical regulation based on pseudo-output gap. Secondly, during the full sample period, the central bank has obvious preferences for avoiding deflation and economic contraction. Thirdly, the estimated results of the segmented welfare loss function show that from 2012 to 2019, the central bank structurally changed its policy regulation mechanism with obvious inert area in the welfare losses of pseudo-output gap and deflation deviation, meaning the central bank gradually turned to more flexible and moderate interval regulation.

Keywords: Central Bank; Pseudo-output Gap; Taylor Rule; Welfare Loss Function; Interval Regulation