Interest Rate Liberalization, Permanent Technology Shocks, and Macroeconomic Volatility in China

Qiaoyu Liang (), Yihao Xue () and Bing Tong ()
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Qiaoyu Liang: School of Economics at Henan University, Kaifeng, Henan
Yihao Xue: School of Economics at Henan University, Kaifeng, Henan
Bing Tong: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan
Authors registered in the RePEc Author Service: Makram El-Shagi

No 2023/2, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: Are technology shocks contractionary or expansionary when interest rates are inflexible? This paper studies this issue based on Chinese data during the interest rate reform. We decompose the technology shock into permanent and transitory components and investigate their macroeconomic effects based on the New Keynesian model and the local projection method. Our empirical results show that interest rate fixation amplifies the effects of permanent technology shocks: a positive shock generates higher output and inflation during the period of fixed interest rates. This result is consistent with the New Keynesian model's prediction for permanent technology shocks. However, the empirical results for transitory technology shocks are insignificant.

Keywords: Technology Shock; Interest rate liberalization; Total factor productivity (TFP); Macroeconomic Volatility (search for similar items in EconPapers)
JEL-codes: E31 E42 E43 E52 E58 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-cna, nep-des, nep-dge and nep-fdg
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