Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control

51 Pages Posted: 20 Mar 2015

See all articles by Michael Funke

Michael Funke

University of Hamburg - Department of Economics; Tallinn University of Technology (TUT)

Petar Mihaylovski

University of Hamburg - Department of Economics

Haibin Zhu

J.P. Morgan Chase Bank, Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2015

Abstract

​The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.

Keywords: DSGE model, monetary policy, financial market reform, shadow banking, China

JEL Classification: E32, E42, E52, E58

Suggested Citation

Funke, Michael and Mihaylovski, Petar and Zhu, Haibin, Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control (March 9, 2015). BOFIT Discussion Paper No. 9/2015, Available at SSRN: https://ssrn.com/abstract=2580241 or http://dx.doi.org/10.2139/ssrn.2580241

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

Petar Mihaylovski

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Haibin Zhu

J.P. Morgan Chase Bank, Hong Kong ( email )

Hong Kong

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