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Bank loans and the effects of monetary policy in China: VAR/VECM approach

  • Sun, Lixin
  • Ford, J.L.
  • Dickinson, David G.

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.

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Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 21 (2010)
Issue (Month): 1 (March)
Pages: 65-97

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Handle: RePEc:eee:chieco:v:21:y:2010:i:1:p:65-97
Contact details of provider: Web page: http://www.elsevier.com/locate/chieco

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  1. Sims, Christopher A, 1998. "Comment on Glenn Rudebusch's "Do Measures of Monetary Policy in a VAR Make Sense?"," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 933-41, November.
  2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Modeling Money," NBER Working Papers 6371, National Bureau of Economic Research, Inc.
  4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  5. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  7. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  8. 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.
  9. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  10. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers 269, Banca Italia - Servizio di Studi.
  11. Ivanov Ventzislav & Kilian Lutz, 2005. "A Practitioner's Guide to Lag Order Selection For VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-36, March.
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