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Does Monetary Policy Matter in China? A Narrative Approach

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  • Sun, Rongrong

Abstract

This paper applies the narrative approach to monetary policy in China to tackle two problems of policy measurement. The first problem arises because the PBC (the central bank of China) applies multiple instruments and none of them per se can adequately reflect changes in its monetary policy. The second one is the classical identification problem: the causation direction of the observed interaction between central bank actions and real activity needs to be identified. The PBC’s documents are used to infer the intentions behind policy movements. Three shocks are identified for the period 2000-2011 that are exogenous to real output. Estimates using these shocks and various robustness tests indicate that monetary policy has large and persistent impact on output in China.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45023.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:45023

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Keywords: exogenous shocks; the narrative approach; real effects of monetary policy;

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  1. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  2. Romer, Christina D. & Romer, David H., 1997. "Identification and the narrative approach: A reply to Leeper," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(3), pages 659-665, December.
  3. Alberto Alesina & Carlo Ambrogio Favero & Francesco Giavazzi, 2012. "The output effect of fiscal consolidations," Working Papers 450, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-15, C.V. Starr Center for Applied Economics, New York University.
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  13. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(3), pages 641-657, December.
  14. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
  15. Hongyi Chen & Qianying Chen & Stefan Gerlach, 2011. "The Implementation of Monetary Policy in China: The Interbank Market and Bank Lending," Working Papers 262011, Hong Kong Institute for Monetary Research.
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  17. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  18. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
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