A Structural Investigation of the Chinese Economy with a Hybrid Monetary Policy Rule

25 Pages Posted: 3 Apr 2015 Last revised: 7 Apr 2015

See all articles by Ran Li

Ran Li

Peking University

Jiao Wang

Australian National University (ANU)

Date Written: April 1, 2015

Abstract

In this paper, we aim to understand how monetary policy is conducted in China and what the main sources of fluctuations in China’s business cycle are. To this end, we extend a standard New Keynesian dynamic stochastic general equilibrium model with financial frictions and investment-specific technology shocks. We incorporate a hybrid form of monetary policy rule and employ a Bayesian estimation strategy using Chinese data. We find that the People’s Bank of China conducts monetary policy by adjusting the policy rate in response to inflation, output growth as well as real money growth. We also find that neutral technology shocks are the main drivers of the fluctuations in output and consumption while the investment-specific technology shock is the primary source of the variation in investment. This paper offers a new way of examining the rule of China’s monetary policy and indicates a structural break of the neutral technology development that may have caused the slowing down of GDP growth since 2010.

Keywords: monetary policy, business fluctuation, Bayesian estimation, dynamic stochastic general equilibrium model, China

JEL Classification: E32, E43, E52

Suggested Citation

Li, Ran and Wang, Jiao, A Structural Investigation of the Chinese Economy with a Hybrid Monetary Policy Rule (April 1, 2015). CAMA Working Paper No. 10/2015, Available at SSRN: https://ssrn.com/abstract=2588878 or http://dx.doi.org/10.2139/ssrn.2588878

Ran Li

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Jiao Wang (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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