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Uncertainty, confidence, and monetary policy in China

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  • Lien, Donald
  • Sun, Yuchen
  • Zhang, Chengsi

Abstract

This paper examines the role of confidence in Chinese monetary policy under uncertainty. Using a smooth transition vector autoregression (STVAR) model conditional on uncertainty, we find that monetary policy is considerably less effective in high-uncertainty status. We further conduct counterfactual decompositions to isolate the role of confidence in the transmission of monetary policy shocks, and show that the effectiveness of proactive monetary policy is reduced if it fails to inspire entrepreneurs’ confidence. These results are robust to alternative measurements of uncertainty.

Suggested Citation

  • Lien, Donald & Sun, Yuchen & Zhang, Chengsi, 2021. "Uncertainty, confidence, and monetary policy in China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1347-1358.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:1347-1358
    DOI: 10.1016/j.iref.2019.11.017
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    Cited by:

    1. Karaki, Mohamad B. & Rangaraju, Sandeep Kumar, 2023. "The confidence channel of U.S. financial uncertainty: Evidence from industry-level data," Economic Modelling, Elsevier, vol. 129(C).
    2. Yacine Aït-Sahalia & Felix Matthys & Emilio Osambela & Ronnie Sircar, 2021. "When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance," Finance and Economics Discussion Series 2021-063, Board of Governors of the Federal Reserve System (U.S.).
    3. Jingyuan Yang & Ling Wang & Ziyuan Sun & Fangming Zhu & Yihui Guo & Yan Shen, 2021. "Impact of Monetary Policy Uncertainty on R&D Investment Smoothing Behavior of Pharmaceutical Manufacturing Enterprises: Empirical Research Based on a Threshold Regression Model," IJERPH, MDPI, vol. 18(21), pages 1-17, November.
    4. Long, Shaobo & Zuo, Yulan & Tian, Hao, 2023. "Asymmetries in multi-target monetary policy rule and the role of uncertainty: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 278-296.

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    More about this item

    Keywords

    Uncertainty; Confidence; Monetary policy; STVAR;
    All these keywords.

    JEL classification:

    • 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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