Abstract
Is confidence an important channel through which monetary policy affects the Chinese real economy? To answer this question, this paper uses a counterfactual structural vector autoregression method and examines the impulse responses of entrepreneurs’ confidence to a monetary supply shock for China. The empirical results show that an easing monetary policy can inspire confidence and stimulate economic growth. However, the effectiveness of a positive policy will be undermined if the channel of confidence is removed. Further analysis reveals that the state of confidence matters for credit and pricing decisions. These findings are robust to different measures of monetary policy in China.
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