Abstract
The analysis of increasingly large data sets has become one of the main issues of econometric research, especially in macro econometrics. For the first time, this paper investigates the effects of China's contractionary monetary policy on macro-economy based on 142 monthly variables from January 1998 to June 2011, using the FAVAR approach. Main findings are the following: (1) The contractionary monetary policy shocks result in a gradual decrease in industrial production, real estate climate index, consumption and investment. (2) Although the price puzzle is not completely resolved, it is reduced after adding factors to benchmark VAR. A 50-basis-point innovation in reserve requirement ratios will bring that the maximal decreases in China's CPI is 1.08 after ten months, and when there is a 25-basis-point innovation in interest rates, China's CPI will fall 0.46 after 20 months. (3) Compared with the interest rates, reserve requirement ratios will be more helpful to fall China's inflation and control real estate prices.
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