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Do interest rates play a major role in monetary policy transmission in China?

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  • Güneş Kamber
  • Madhusudan Mohanty

Abstract

We explore the role of interest rates in monetary policy transmission in China in the context of its multiple instrument setting. In doing so, we construct a new series of monetary policy surprises using information from high frequency Chinese finan- cial market data around major monetary policy announcements. Our event analysis shows that monetary policy surprises have persistent effects on interest rates. We then use these surprise measures as external instruments to identify monetary pol- icy shocks in an SVAR. We find that a contractionary monetary policy surprise increases interest rates and significantly reduces inflation and economic activity. Our findings provide further support to recent studies suggesting that monetary policy transmission in China has become increasingly similar to that in advanced economies.

Suggested Citation

  • Güneş Kamber & Madhusudan Mohanty, 2018. "Do interest rates play a major role in monetary policy transmission in China?," BIS Working Papers 714, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:714
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    More about this item

    Keywords

    monetary policy in China; structural VAR; external instruments;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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