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Impacts of Monetary, Fiscal and Exchange Rate Policies on Output in China: A Var Approach

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  • Yu Hsing
  • Wen-Jen Hsieh

Abstract

Applying the VAR model and using the interest rate as a monetary policy variable, we find that in the long run, output in China responds negatively to a shock to the interest rate, the real exchange rate, government debt, or the inflation rate, and it reacts positively to a shock to government deficits or lagged own output. When real M2 is chosen as a monetary policy variable, long-term output in China responds positively to a shock to real M2 or lagged own output, and it reacts negatively to a shock to the real exchange rate, government debt, or government deficits. Its response to a shock to the inflation rate is negative when government debt is used and is positive when government deficits are considered. In the short run, fiscal policy is more important than monetary policy in three out of four cases. In the long run, monetary policy is more influential than fiscal policy in three out of four cases. Therefore, the government may consider conducting monetary and fiscal policies differently in the short run and long run. The government needs to be cautious in pursuing deficit spending as its long-term impacts depend on the monetary variable employed. The policy of maintaining a relatively stable exchange rate is appropriate as the depreciation of the Yuan may hurt the economy in the short run. Copyright Springer 2004

Suggested Citation

  • Yu Hsing & Wen-Jen Hsieh, 2004. "Impacts of Monetary, Fiscal and Exchange Rate Policies on Output in China: A Var Approach," Economic Change and Restructuring, Springer, vol. 37(2), pages 125-139, June.
    • Handle: RePEc:kap:ecopln:v:37:y:2004:i:2:p:125-139
    DOI: 10.1007/s10644-004-7505-0
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    References listed on IDEAS

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    1. Mingwei Yuan & Ms. Kalpana Kochhar, 1994. "China'S Imports: An Empirical Analysis Using Johansen'S Cointegration Approach," IMF Working Papers 1994/145, International Monetary Fund.
    2. Kenneth N. Kuttner & Patricia C. Mosser, 2002. "The monetary transmission mechanism: some answers and further questions," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 15-26.
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    Cited by:

    1. Yingxin Shi & Mototsugu Fukushige, 2015. "Long-Run Fiscal Multipliers for Autonomous Prefectures in China," Pacific Economic Review, Wiley Blackwell, vol. 20(5), pages 687-695, December.
    2. Hou, Xiaohui & Wang, Qing, 2013. "Implications of banking marketization for the lending channel of monetary policy transmission: Evidence from China," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 442-451.
    3. Gunji, Hiroshi & Yuan, Yuan, 2010. "Bank profitability and the bank lending channel: Evidence from China," Journal of Asian Economics, Elsevier, vol. 21(2), pages 129-141, April.
    4. Artatrana Ratha & Eungmin Kang & Mary Edwards, 2008. "Does an Undervalued Currency Promote Growth? Evidence from China," Working Papers 2008-2 Classification- F3, Saint Cloud State University, Department of Economics.

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