Do Interest Rates Play a Major Role in Monetary Policy Transmission in China?

43 Pages Posted: 13 Apr 2018

See all articles by Güneş Kamber

Güneş Kamber

Bank for International Settlements (BIS) - Monetary and Economic Department

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: April 2018

Abstract

We explore the role of interest rates in monetary policy transmission in China in the context of its multiple instrument setting. In doing so, we construct a new series of monetary policy surprises using information from high frequency Chinese financial market data around major monetary policy announcements. Our event analysis shows that monetary policy surprises have persistent effects on interest rates. We then use these surprise measures as external instruments to identify monetary policy shocks in an SVAR. We find that a contractionary monetary policy surprise increases interest rates and significantly reduces inflation and economic activity. Our findings provide further support to recent studies suggesting that monetary policy transmission in China has become increasingly similar to that in advanced economies.

Keywords: monetary policy in China, structural VAR, external instruments

JEL Classification: C22, E5, G14

Suggested Citation

Kamber, Gunes and Mohanty, Madhusudan S., Do Interest Rates Play a Major Role in Monetary Policy Transmission in China? (April 2018). BIS Working Paper No. 714. Available at SSRN: https://ssrn.com/abstract=3158506

Gunes Kamber (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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