The content of this thesis is two-fold. First, I present a detailed overview of the setup and conduction of monetary policy in China. I describe the most important participants, the goals and instruments, and discuss the concepts of independence and transparency in a Chinese setting. I show that conduction of monetary policy in China has come a long way from the Mao-era when the People s Bank of China (PBC) operated as a department of the Ministry of Finance, and the central authorities managed all financial transaction over the state budget. However, in terms of independence the ties between the central bank, other ministries and the China Communist Party are still tight and the areas of responsibility are vaguely defined. In addition, several commercial market participants have close ties to the government and should also be considered as important for the conduction of monetary policy. In sum, I argue that, the PBC cannot be regarded an independent central bank. Furthermore, even though the mandate of monetary policy is given in the law on People s Bank of China, it is not clear how this mandate is integrated in the every-day decision making. In this thesis, I argue that the PBC operates under a two-fold policy goal of price stability and economic growth in the short run, but that it lacks one long-run inflation target rate. Instead, the State Council sets targets for both the inflation rate and the economic growth annually. I argue that these targets must be regarded as maximum and minimum levels respectively. I also show that the PBC officially considers the monetary aggregate, M2, as the intermediate target of monetary policy. The second part of this thesis is an empirical analysis of the conduction of monetary policy in China. As a bridge between the two parts I present a recap on the theoretical background of the inflation bias as presented by Barro and Gordon (1983). Barro and Gordon (1983) and later literature show that a positive inflation bias could evolve in the economy as a consequence of the central bank s wish to stabilize growth around a level that exceeds the natural level of growth. My empirical analysis describes the difficulties in measuring inflation in an emerging economy as the Chinese one. By the use of available data, I show that the Chinese households must me regarded increasingly rational when forming their inflation expectations. Moreover, I argue that it seems like the general public finds the PBC credible, and the inflation expectations seems to follow the development in the annual inflation targets defined by the State Council. Finally, I make use of both official statistics on the inflation rate and the market s inflation expectations to search for a positive inflation bias in the Chinese economy. I show that the realized inflation in China has exceeded the inflation target for about 35 percent of the time since 1996. I argue that, even though my description of the conduction of monetary policy in China shows that many of the necessary conditions for inflation bias to evolve are fulfilled, this is a too little share of time to conclude that such inflation bias is present in the Chinese economy. Nonetheless, I show that the inflation rate has been highly volatile over the same period, both compared to inflation in other countries and to domestic economic growth. I argue that this could indicate that the PBC places a majority of the weight on output when conducting monetary policy. In this thesis, I also present possible steps forward for the conduction of monetary policy in China that could create a more stable inflation rate and avoid the future possibility for a positive inflation bias in the Chinese economy. Most importantly, I argue that replacing the constantly shifting inflation target by a medium- or long term constant inflation rate would make the Chinese monetary policy more predictable, and if communicated the right way increase the transparency of the conduction of monetary policy. The cost will be a somewhat higher volatility in output growth. On the other side, the gain will be a much more stable inflation rate in the long run, which in itself could lead to higher growth as it makes it easier for the general public to form their expectations about future inflation.