The Effectiveness of China's Fiscal and Monetary Policy and the Impact of Uncertainty Shocks: From the Perspective of Three Industries

Abstract

Under the influence of major random events such as US-China trade dispute and the coronavirus (COVID-19) outbreak, the uncertainty of macroeconomic regulation has also risen significantly. Then, what role economic policy level shocks and uncertainty shocks play in industrial regulation need to be clarified urgently. This study constructs a large-scale benchmark VAR model including fiscal and monetary policy and three-industry output and inflation, makes a detailed distinction between policy level shocks and uncertainty shocks, and describes the industrial control mechanism of economic policy from a new perspective. The main conclusions are as follows: firstly, compared with the ordinary VAR model, the benchmark VAR model has significant advantages in modeling efficiency, system stability and explanatory power, making it more suitable for describing the transmission mechanism of economic policy. Secondly, in terms of the role of policy uncertainty, its influence sometimes even exceeds the level impact, but in most cases, it is manifested as suppressing the output of the three industries, and the impact on industrial inflation is also dual at the same time. It shows that policy uncertainty is prone to adverse effects, and policy authorities should be more cautious in its use. Finally, from perspective of the adjustment of the three industries, tax and fee reduction are a relatively dominant means to optimize the output of the three industries, while in terms of maintaining price stability, the steady interest rate regulation is more efficient.