Re-assessing Monetary Policy Shocks in China

In this paper we investigate the effects of monetary policy shocks on economic activity in China using a variety of Bayesian VARs. We using a variety of Bayesian VAR specifications including alternative priors and steady-state Priors. In addition we specify an underlying economic model for the long-run which applies to non-stationary data where we allow for time-varying equilibrium on the steady-state using a simulation smoother for latent processes. We show the implications for understanding China's Business Cycle. We show that monetary policy shocks have a significant effect on economic activity. The models also show that tight monetary policy was one of the key drivers of the growth slowdown since 2012. These findings are robust across both different interest rates and different model specifications. Looking ahead, we show that that a further slowdown of the Chinese economy can be expected when we impose a tight prior on the steady-state of the model and monetary policy is only partially off-setting the slowdown.