The Dynamic Effectiveness of China's Monetary Policy: An Empirical Analysis Based on the TVP-SV-FAVAR Model
Abstract Based on Chinese monthly data from January 2000 to December 2014, and taking into account the structural mutation characteristics in the process of China's economic development, this paper empirically studies the dynamic effectiveness of China's monetary policy by using the factor-augmented vector autoregressive model with time-varying parameters and stochastic volatility (TVP-SV-FAVAR). The results indicate that: Overall, monetary policy can respond actively to both output and inflation rate. Quantitative monetary policy is more effective than price-based monetary policy in regulating macro economy. The regulatory effect of quantitative monetary policy on output and inflation rate shows a declining trend. The regulatory effect of price-based monetary policy on output weakens gradually, but its regulatory effect on the price level has gradually improved after the crisis. Quantitative monetary policy has a better regulatory effect on variables such as consumption, investment, import, export and bank credit. Price-based monetary policy is more effective in regulating deposit and loan rates, the RMB exchange rate, stock market and so on. In addition, the results show that the "price puzzle" problem can be solved to a certain degree or even completely eliminated.
This paper is published in World Economy Studies, No.12, 2016.