Asset prices, regime switches, and monetary policy: evidence from China

Yong Ma and D. Chen

Applied Economics, 2025, vol. 57, issue 52, 8817-8838

Abstract: This paper develops a regime-switching DSGE model that can capture time-varying volatilities in economic activity and monetary policy. The model is then used to study regime switches in macroeconomic dynamics and monetary policy in China. The results suggest a better fitness of the regime-switching model than conventional constant-parameter models. We also find notable differences in macroeconomic dynamics and monetary policy reactions between high and low volatility regimes. Further counterfactual analysis suggests that, at least in an environment with regime-switching volatilities, the optimal reaction of monetary policy involves responses to asset price variations. The findings of the paper shed new light on the regime-switching properties of the economy and the optimal choice of monetary policy within this context.

Date: 2025
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DOI: 10.1080/00036846.2024.2404724

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