Abstract

http://ssrn.com/abstract=1806347
 
 

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Monetary Policy Rules and Business Cycle in China: Bayesian DSGE Model Simulation


Lixin Sun


Center for Economic Research, Shandong University

Somnath Sen


University of Birmingham - Department of Economics

April 9, 2011


Abstract:     
In this paper, using a benchmark Bayesian Dynamic Stochastic General Equilibrium (Bayesian DSGE) model (Smets-Wouters Model) with Taylor’s rule and a modified Smets-Wouters model with a money growth rule, we have simulated China’s monetary policy transmission process and the roles of monetary variables and non monetary variables in China’s business cycle by incorporating many so-called New Keynesian Macroeconomic (NKM) approaches such as nominal stickiness and market imperfections in the model. The estimated values of the parameters in the model by Bayesian approach based on China’s quarterly time series data feature the unique characters of China’s economy compared with that in the US and the Euro area. The simulation results in terms of the Taylor’s rule and money growth rule (MacCullum Rule) highlight the monetary transmission mechanisms of China’s monetary policy and the diverse contributions of monetary shocks and non-monetary shocks to China’s business cycle.

Number of Pages in PDF File: 40

Keywords: DSGE Model, Monetary Policy, China’s Business Cycle, Bayesian Approach, Taylor’s Rule, Money Growth Rule

JEL Classification: E3, E5, C5

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Date posted: April 11, 2011 ; Last revised: November 24, 2011

Suggested Citation

Sun, Lixin and Sen, Somnath, Monetary Policy Rules and Business Cycle in China: Bayesian DSGE Model Simulation (April 9, 2011). Available at SSRN: http://ssrn.com/abstract=1806347 or http://dx.doi.org/10.2139/ssrn.1806347

Contact Information

Lixin Sun (Contact Author)
Center for Economic Research, Shandong University ( email )
Shanda Nanlu 27#
Jinan, Shandong 250100
China
HOME PAGE: http://www.cer.sdu.edu.cn/
Somnath Sen
University of Birmingham - Department of Economics ( email )
Economics Department
Birmingham, B15 2TT
United Kingdom
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