Monetary Policy Effectiveness in China: Evidence from a FAVAR Model
John Fernald (),
Mark Spiegel and
Eric Swanson
No 2014-7, Working Paper Series from Federal Reserve Bank of San Francisco
Abstract:
We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
Keywords: Measuring China’s economy; dynamic factor models; factor-augmented VARs; monetary policy (search for similar items in EconPapers)
JEL-codes: C3 E4 E5 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-02-24
New Economics Papers: this item is included in nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)
Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp2014-07.pdf Full text (application/pdf)
Related works:
Journal Article: Monetary policy effectiveness in China: Evidence from a FAVAR model (2014) 
Working Paper: Monetary Policy Effectiveness in China: Evidence from a FAVAR Model (2014) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2014-07
Ordering information: This working paper can be ordered from
DOI: 10.24148/wp2014-07
Access Statistics for this paper
More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().