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Effectiveness of Monetary Policy in China: Evidence from Factor-Augmented Vector Autoregression Model

Author

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  • Yunpeng Sun

    (School of Economics, Tianjin University of Commerce, Tianjin 300134, China)

  • Jingjia Zhang

    (APEC Study Center, Nankai University, Tianjin 300071, China; Collaborative Innovation Center for China Economy, Nankai University, Tianjin 300071, China)

Abstract

Since 2002, the People's Bank of China has frequently used both quantity-based direct monetary instruments and price-based indirect monetary instruments to promote economic growth and stabilize price level. Specifically, this study estimates 13 three-variable factor-augmented vector autoregression (FAVAR) models to explore how two types of monetary instruments affect China's economy and price level. Overall, we find that monetary policy has positive effects on China's economy and price level. Second, this study clearly states that the effectiveness of China's monetary policy on the economy has depended on China's quantity-based direct monetary instruments since 2002. Third, the effectiveness of quantity-based direct monetary instruments on China's economy and price level is dependent on the significant and positive effects of quantity-based direct monetary instruments after the 2008 financial crisis. Fourth, the significant and positive effects of price-based indirect monetary instruments on China's economy and price level before 2008 cannot fundamentally change their current insignificant effects on China's economy and price level.

Suggested Citation

  • Yunpeng Sun & Jingjia Zhang, 2019. "Effectiveness of Monetary Policy in China: Evidence from Factor-Augmented Vector Autoregression Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 14(3), pages 336-370, September.
    • Handle: RePEc:fec:journl:v:14:y:2019:i:3:p:336-370
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-008-019-0016-9
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    More about this item

    Keywords

    China's monetary policy; quantity-based direct instruments; price-based indirect instruments; factor-augmented vector autoregression model (FAVAR);
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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