Do interest rates play a major role in monetary policy transmission in China?

Gunes Kamber and Madhusudan Mohanty

No 714, BIS Working Papers from Bank for International Settlements

Abstract: We explore the role of interest rates in monetary policy transmission in China in the context of its multiple instrument setting. In doing so, we construct a new series of monetary policy surprises using information from high frequency Chinese finan- cial market data around major monetary policy announcements. Our event analysis shows that monetary policy surprises have persistent effects on interest rates. We then use these surprise measures as external instruments to identify monetary pol- icy shocks in an SVAR. We find that a contractionary monetary policy surprise increases interest rates and significantly reduces inflation and economic activity. Our findings provide further support to recent studies suggesting that monetary policy transmission in China has become increasingly similar to that in advanced economies.

Keywords: monetary policy in China; structural VAR; external instruments (search for similar items in EconPapers)
JEL-codes: C22 E5 G14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-04
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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