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Factor-augmented VAR analysis of the monetary policy in China

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  • He, Qing
  • Leung, Pak-Ho
  • Chong, Terence Tai-Leung

Abstract

We investigate the transmission mechanism of monetary policy in China over the past decades with emphasis on the post-Asian crisis period. A factor-augmented VAR method is used to study the effectiveness of monetary policy instruments in stabilizing the Chinese economy. We find that repo rate, benchmark lending rate, and a market-based monetary stance have little impact on the Chinese economy, and are only mildly effective when the exchange rate is more market-determined. The non-market-based measures of People's Bank of China, such as growth rates of total loan and money supply, are effective in adjusting the real economy and price level. Given the slow pace of exchange rate reform, China is likely to continue employing non-market-based policies in the near future.

Suggested Citation

  • He, Qing & Leung, Pak-Ho & Chong, Terence Tai-Leung, 2013. "Factor-augmented VAR analysis of the monetary policy in China," China Economic Review, Elsevier, vol. 25(C), pages 88-104.
  • Handle: RePEc:eee:chieco:v:25:y:2013:i:c:p:88-104
    DOI: 10.1016/j.chieco.2013.03.001
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    More about this item

    Keywords

    Factor model; Principal components; VAR; Monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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