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Interest Rate Liberalization, Permanent Technology Shocks, and Macroeconomic Volatility in China

Author

Listed:
  • Qiaoyu Liang

    (School of Economics at Henan University, Kaifeng, Henan)

  • Yihao Xue

    (School of Economics at Henan University, Kaifeng, Henan)

  • Bing Tong

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

Abstract

Are technology shocks contractionary or expansionary when interest rates are inflexible? This paper studies this issue based on Chinese data during the interest rate reform. We decompose the technology shock into permanent and transitory components and investigate their macroeconomic effects based on the New Keynesian model and the local projection method. Our empirical results show that interest rate fixation amplifies the effects of permanent technology shocks: a positive shock generates higher output and inflation during the period of fixed interest rates. This result is consistent with the New Keynesian model's prediction for permanent technology shocks. However, the empirical results for transitory technology shocks are insignificant.

Suggested Citation

  • Qiaoyu Liang & Yihao Xue & Bing Tong, 2023. "Interest Rate Liberalization, Permanent Technology Shocks, and Macroeconomic Volatility in China," CFDS Discussion Paper Series 2023/2, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    • Handle: RePEc:fds:dpaper:202302
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    More about this item

    Keywords

    Technology Shock; Interest rate liberalization; Total factor productivity (TFP); Macroeconomic Volatility;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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