Great moderation with Chinese characteristics: Uncovering the role of monetary policy

This paper examines the contribution of multiple monetary policy instruments in explaining China's enhanced macroeconomic stability with time-varying parameter structural vector autoregression models. Our analysis is novel since existing literature primarily investigates the role of interest rates in the Great Moderation phenomenon in advanced economies, neglecting the potential impact of alternative monetary policy tools on similar episodes in emerging economies. We find that both quantity- and interest rate-based monetary policy instruments have been actively used to moderate macroeconomic fluctuations, with the efficacy of short-term interest rates increasing and required reserve ratio and money growth decreasing. However, these instruments on average account for a modest fraction of output and inflation variability over the estimation period. Moreover, systematic monetary policy has recently become more inflation-averse, but it still violates the Taylor principle. Therefore, while China's shift towards an interest rate-based policy framework is commendable, it remains incomplete.