Monetary Policy Uncertainty, Credit Risk and China's Macroeconomic Fluctuations

Abstract

This paper examines the effects of monetary policy uncertainty (MPU) on China's banks' credit risks and China's macroeconomic fluctuations. By incorporating the stochastic volatility into the quantity-based monetary policy rule, we provide a specific measure for China's MPU through Bayesian MCMC method. The bank-level evidences show that an increase of China's MPU could bring about the rise of non-performing loan ratio and thus exacerbate banks' credit risks. The historical decompositions from the Bayesian SVAR model reveal that the dramatic increase of China's MPU after 2008 financial crisis brought about -0.75% output growth rate loss in 2009 Q1. And our nonlinear VAR model shows that the negative impacts of MPU on economic activities are much stronger and more persistent when the economy enters the high credit risk regime.Simulations from the nonlinear DSGE model featuring credit risk and uncertainty shock confirm that banks' credit risks might be potential transmission channel through which China's monetary policy uncertainty shock affect its real economy.