A structural investigation of the Chinese economy with a hybrid monetary policy rule

Ran Li and Jiao Wang

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: In this paper, we aim to understand how monetary policy is conducted in China and what the main sources of fluctuations in China’s business cycle are. To this end, we extend a standard New Keynesian dynamic stochastic general equilibrium model with financial frictions and investment-specific technology shocks. We incorporate a hybrid form of monetary policy rule and employ a Bayesian estimation strategy using Chinese data. We find that the People’s Bank of China conducts monetary policy by adjusting the policy rate in response to inflation, output growth as well as real money growth. We also find that neutral technology shocks are the main drivers of the fluctuations in output and consumption while the investment-specific technology shock is the primary source of the variation in investment. This paper offers a new way of examining the rule of China’s monetary policy and indicates a structural break of the neutral technology development that may have caused the slowing down of GDP growth since 2010.

Keywords: Monetary policy; business fluctuation; Bayesian estimation; dynamic stochastic general equilibrium model; China (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-04
New Economics Papers: this item is included in nep-cna, nep-dge, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2015-10

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