A Fixed-Interest-Rate New Keynesian Model of China

Bing Tong (bing1046@126.com) and Guang Yang
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Guang Yang: School of Economics, Nankai University

No 2020/1, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: Nominal interest rates in China has long been controlled by the government, making their changes lagging behind price changes. We model this in a New Keynesian model with a transiently fixed interest rate, and prove that interest rate fixation can magnify model volatility and lead to economic instability. Under the fixed interest rate, the model enters a vicious spiral until monetary policy switches to a flexible interest rate rule, which represents the shadow rate of the economy, determined by discrete (and insufficient) interest rate adjustments and other policy tools. This explains Chinas large business cycle fluctuations over the past decades.

Keywords: Interest rate peg; Chinese economy; New Keynesian Model; Monetary policy; Business cycle (search for similar items in EconPapers)
JEL-codes: E31 E32 E42 E52 E58 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-04
New Economics Papers: this item is included in nep-cna, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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