Effectiveness of Monetary Policy in China: Evidence from Factor-Augmented Vector Autoregression Model

Yunpeng Sun and Jingjia Zhang ()
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Yunpeng Sun: School of Economics, Tianjin University of Commerce, Tianjin 300134, China
Jingjia Zhang: APEC Study Center, Nankai University, Tianjin 300071, China; Collaborative Innovation Center for China Economy, Nankai University, Tianjin 300071, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2019, vol. 14, issue 3, 336-370

Abstract: Since 2002, the People's Bank of China has frequently used both quantity-based direct monetary instruments and price-based indirect monetary instruments to promote economic growth and stabilize price level. Specifically, this study estimates 13 three-variable factor-augmented vector autoregression (FAVAR) models to explore how two types of monetary instruments affect China's economy and price level. Overall, we find that monetary policy has positive effects on China's economy and price level. Second, this study clearly states that the effectiveness of China's monetary policy on the economy has depended on China's quantity-based direct monetary instruments since 2002. Third, the effectiveness of quantity-based direct monetary instruments on China's economy and price level is dependent on the significant and positive effects of quantity-based direct monetary instruments after the 2008 financial crisis. Fourth, the significant and positive effects of price-based indirect monetary instruments on China's economy and price level before 2008 cannot fundamentally change their current insignificant effects on China's economy and price level.

Keywords: China's monetary policy; quantity-based direct instruments; price-based indirect instruments; factor-augmented vector autoregression model (FAVAR) (search for similar items in EconPapers)
JEL-codes: E02 E31 E52 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:14:y:2019:i:3:p:336-370

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