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Studying on the monetary transmission mechanism in China in the presence of structural changes

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  • Yang Fan
  • Teng Jianzhou
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    Abstract

    Purpose–This paper aims to study the monetary transmission mechanism of China from January 1996 to December 2009 under endogenous structural breaks. Design/methodology/approach–The study constructs a benchmark VAR model and then adds the proxy variables for four channels of monetary policy transmission as endogenous or exogenous variables in the model to study the transmission mechanism in China. Considering a number of reforms carried out in the economic and financial field in the past two decades and the possibility of structural changes in the monetary transmission mechanism, the methodology proposed by Qu and Perron is employed to allow for endogenous structural changes in the model. Findings–By conducting a comparative analysis, conclusions can be drawn from this paper that bank lending is always the dominating channel for monetary policy to influence economy in China and the roles of the interest rate channel and the exchange rate channel have been improved in recent years. However, the role of the asset price channel in monetary policy transmission has weakened since late 2001. Originality/value–This paper combines the quasi-maximum likelihood procedure proposed by Qu and Perron in 2007 with a benchmark VAR model, thus providing a new approach to study monetary transmission mechanism and the conclusions can be more sensible.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 1 (2011)
    Issue (Month): 4 (August)
    Pages: 334-357

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    Handle: RePEc:eme:cfripp:v:1:y:2011:i:4:p:334-357

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    Related research

    Keywords: Benchmarking VAR model; China; Monetary transmission mechanism; Quasi-maximum likelihood; Structural changes;

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    References

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    1. Serena Ng & Timothy J. Vogelsang, 1997. "Analysis of Vector Autoregressions in the Presence of Shifts in Mean," Boston College Working Papers in Economics 379, Boston College Department of Economics.
    2. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
    3. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    5. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    6. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    7. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    8. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    9. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
    10. Zhongjun Qu & Pierre Perron, 2007. "Estimating and Testing Structural Changes in Multivariate Regressions," Econometrica, Econometric Society, vol. 75(2), pages 459-502, 03.
    11. Sun, Lixin & Ford, J.L. & Dickinson, David G., 2010. "Bank loans and the effects of monetary policy in China: VAR/VECM approach," China Economic Review, Elsevier, vol. 21(1), pages 65-97, March.
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