The Asymmetric Transmission of China's Monetary Policy

Tao Zha and Kaiji Chen

No 516, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: China monetary policy, as well as its transmission into the economy, is yet to be understood by researchers and policymakers. We propose a new estimation method and use it to quantify the monetary transmission of China's monetary policy within the endogenous-switching nonlinear SVAR framework. We find strong evidence that contributions of monetary policy shocks to the GDP fluctuation are asymmetric across different states of the economy. The effect of monetary policy on output is supported more by medium and long term bank loans than by short term bank loans. This is especially true for the shortfall state, in which an increase of M2 is channeled disproportionally into MLT loans. These findings highlight the role of M2 growth as a primary instrument and the bank lending channel to investment as a key transmission mechanism for monetary policy. Our analysis shows that China monetary policy has unbalanced effects on consumption and investment.

Date: 2017
New Economics Papers: this item is included in nep-cna, nep-mon and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:516

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