Household consumption and monetary policy in China

Abstract

In recent years, the People's Bank of China (PBC) has been relying increasingly on the adjustment of nominal interest rates for stabilization purposes. This paper employs the Euler equation approach to examine the effect of monetary policy, conducted through the interest rate channel, on household consumption. Econometric estimates of six related models suggest a weak substitution effect of the real interest rate. Inflation rates seem to be more relevant to household consumption decisions than do nominal interest rates. The results provide much evidence for the significance of liquidity constraints, but little for that of precautionary savings.