Monetary policy in China: A Factor Augmented VAR approach

Boniface Yemba, Erick Kitenge, Biyan Tang and Neepa B. Gaekwad

International Review of Economics & Finance, 2024, vol. 89, issue PA, 975-1008

Abstract: This paper investigates the effectiveness of Chinese monetary policy. We employ the data-rich Factor Augmented VAR (FAVAR) model to address the paucity of Chinese data. We find that the Divisia monetary aggregate M2 (DMA2) that considers both the quantity of monetary assets and the user-cost of the money/forgone interest rate is more effective in boosting economic activities and prices than other instruments (e.g., interest rate, simple money supply M2, and required reserve ratio). These other instruments produce outcomes that contradict theoretical predictions in at least one area. Therefore, we suggest the use of the DMA2 to steer the performance of the Chinese economy effectively.

Keywords: Monetary policy; FAVAR; Chinese economy (search for similar items in EconPapers)
JEL-codes: C3 E4 E51 E52 E59 F31 F41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:975-1008

DOI: 10.1016/j.iref.2023.07.088

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