Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172906
Authors: 
Chen, Kaiji
Higgins, Patrick
Waggoner, Daniel F.
Zha, Tao
Year of Publication: 
2016
Series/Report no.: 
Working Paper No. 2016-9
Abstract: 
China monetary policy, as well as its transmission, is yet to be understood by researchers and policymakers. In the spirit of Taylor (1993, 2000), we develop a tractable framework that approximates practical monetary policy of China. The framework, grounded in relevant institutional elements, allows us to quantify the policy effects on output and prices. We find strong evidence that monetary policy is designed to support real GDP growth mandated by the central government while resisting inflation pressures and that contributions of monetary policy shocks to the GDP fluctuation are asymmetric across different states of the economy. These findings highlight the role of M2 growth as a primary instrument and the bank lending channel to investment as a key transmission mechanism for monetary policy. Our analysis sheds light on institutional constraints on a gradual transition from M2 growth to the nominal policy interest rate as a primary instrument for monetary policy.
Subjects: 
monetary transmission
endogenous switching
central government
institutional rigidities
GDP growth target
lower growth bound
nonlinear VAR
systematic monetary policy
policy shocks
heavy industries
investment
bank loans
lending channel
JEL: 
E5
E02
C3
C13
Document Type: 
Working Paper

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