Monetary Policy In China Research Articles

Role of Oil Prices in Exchange Rate Devaluation: Risks of the Russian Ruble and Other Currencies

Subject and topic. Currently, the decrease in payments on foreign debts and a decrease in imports have an impact on the demand in the foreign exchange market. As a result, a situation has arisen due to the actions of the Bank of Russia, caused by threats of sanctions that provoked the absence of excessive demand and adequate supply in the foreign exchange market and led to a decrease in ruble exchange rate fl uctuations due to oil price movements.The subject of research is to determine the role of oil prices in the formation of monetary policy, which can be a key driver of economic growth.Objective. Identifi cation of exchange rate management practices with the search for the relationship between the current account of the balance of payments and the volatility of the national currency exchange rate.Research methods, the main provisions. Methods used grouping, comparing and summarizing economic indicators to study the characteristics and trends of the monetary policy of China, South Korea and Latin American countries.A critical analysis of the various points of view of leading scientists on the negative or positive impact of the exchange rate on the development of the economy was carried out. At the same time, it is interesting to analyze the views of individual economists that the dependence of the ruble exchange rate on oil prices has recently largely decreased.The main results of the study. Determination of the theoretical relationship between the price of oil and the exchange rate, based on the shock component, either in oil prices or in the exchange rate, with testing the response of the economic variable to this shock.Main conclusions. It was concluded that in the conditions of the economic situation of the last decade, the main problem of export-oriented and import-oriented countries is the imbalance of the current account of the balance of payments, as well as its relationship, primarily with the prices of export goods.

Modeling the Effects of Coordinating Macro-Prudential Rule and Monetary Policy

We develop a new Keynesian model featuring a dual-pillar monetary policy. We employ this framework to analyze the effects of coordinating macro-prudential rule and monetary policy in China using different tools. The simulation results show that: (1) adopting macro-prudential rule and monetary policy simultaneously can achieve a more stable economic environment than using monetary policy alone; (2) a price-based monetary policy is more effective in stabilizing economic fluctuations than a quantity-based monetary policy when considering the macro-prudential policy; (3) the combination of quantity-based monetary policy and macro-prudential rule can stabilize housing prices and credit growth better than the price-based tools. The study shows that when house prices rise rapidly owing to external shocks, adopting the quantity-based policy instruments and macro-prudential policy is a wise choice. When the financial condition is stable, the combination of price-based instruments and macro-prudential rule is better.

Chinese shadow banking, financial regulation and effectiveness of monetary policy

This paper studies the implications of the presence of shadow banking for economic activity and the effectiveness of monetary policy in China. To explore this topic, we develop a model of the Chinese economy using a DSGE framework that accommodates interacting traditional and shadow banks. China's two specific banking regulations, in the form of loan-to-deposit ratio (LDR) and loan quota, only applies to the traditional banks. Our estimates show that regulation shocks have been the major driver of China's rising shadow banking during 2009–2016. Shadow banking leads to a higher amount of credit in the economy by helping escape constraints from traditional intermediaries, however financial frictions in the shadow banking sector create a “dual financial acceleration” mechanism. We show how the presence of shadow banking negatively affects the transmission of monetary policy and the effectiveness of macroprudential policy. We also demonstrate that deleveraging policy, that has been implemented in China tightening shadow banking in the spirit of the “look-through”, may have a contractionary impact on the economy. Efficient policy frontier analysis suggests that coordinating monetary policy and leverage ratio regulation would have helped stabilize the economy while reduce the share of shadow banking.

Optimal Monetary Policy in China with Money as Not Redundant

AbstractThis article provides three pieces of evidence to show that money is not redundant in China: aggregate real money balance can affect aggregate demand even when its effect through short‐term interest rates is controlled. I estimate a DSGE model using Chinese data. With the estimated model, I find that monetary policy that controls the money supply (the quantity rule) is better than the one that controls the short‐term interest rate (the price rule) in terms of minimising welfare loss. I then discuss the optimal monetary policy that combines both the price rule and the quantity rule.

The dynamic effectiveness of monetary policy in China: evidence from a TVP-SV-FAVAR model

ABSTRACTWe use a broad set of China’s macroeconomic indicators and a dynamic factor model to estimate latent factors of economic output and inflation, which are used to measure the ultimate objectives of monetary policy. The above factors and policy variables are incorporated into a TVP-SV-FAVAR model to investigate the dynamic effectiveness of Chinese monetary policy. Our results confirm that the effects of Chinese monetary policy are time-varying. By comparing the quantity rule with the price rule, we find that the price rule is more effective in managing China’s macro-economy, especially after the financial crisis. Moreover, the results can be regarded as a division of policy rules in a way that different rules are directed at different objectives.

Return to the Cage: Monetary Policy in China’s First Five-Year Plan

During China’s First Five-Year Plan (1953–1957), a state purchasing monopsony on grain injected sudden, concentrated spurts of cash into the rural economy. Grassroots cadres faced a new problem: peasants with too much cash burning a hole in their collectivized pocket were prone to “spontaneous capitalist tendencies,” including high-interest lending, hoarding, and black-market activity. By examining previously unused documents from the Wenzhou Party Committee, this study explores the role of “huilong”—the return flow of cash into the coffers of the People’s Bank of China—as a tool of local governance to mitigate such tendencies. Ultimately, the study shows that illicit economic activity was not merely a function of capitalist ideology but was a structural side effect of the planned economy itself. Regional authorities recognized this. Their attempts to curb capitalist behavior reflected a sophisticated appreciation of the perils of excess money and an almost monetarist policy prescription to counter them.

An Empirical Analysis of the Risk Taking Channel of Monetary Policy in China—Base on Evidence from Chinese Listed Bank

After financial crisis in 2008, more and more researchers paid attention to not only the expansionary monetary policy but also the relationship between the risk-taking and monetary policy. Borio and Zhu firstly researched on risk-taking channel of monetary policy in 2008. This article firstly reviews some literature about the risk-taking channel of monetary policy, the transmission mechanism and the influencing factors, and then selects the data of 15 representative listed Banks in China from 2007-2016 to do empirical research and draw the following conclusions. First, this article finds evidence that the risk-taking channel of monetary policy is significant in China. Expansionary monetary policy has a positive impact on banks’ risk-taking. Second, macro-economic conditions and the micro characteristics of the bank can influence the transmission of risk-taking channel. Based on that, this article proposes the recommendation that monetary policy should be included in macro-prudential system to strengthen monitoring system of the bank’s risk management. Besides the relationship between counter-cyclical capital regulation and monetary policy control is important.

The time-varying effect of monetary policy in China

ABSTRACTA sound understanding of monetary transmission mechanism is valuable because it helps the central bank to determine the proper course of monetary policy to balance growth and inflation. As China’s domestic financial markets deepen and develop further towards a market-based system, the country’s monetary policy instrument and transmission should continue to improve for managing economic conditions. Using a short-term key interest rate as standard monetary policy tool and time-varying parameter techniques, this study empirically demonstrates that China’s monetary policy framework is in the midst of transitioning to a market-based approach.

The effectiveness of the monetary policy in China: New evidence from long-range cross-correlation analysis and the components of multifractality

This study examines the long-range cross-correlations between the Chinese Renminbi (RMB) exchange rate and the Shanghai Interbank Offered Rate (Shibor) markets both on qualitative and quantitative basis, using a comprehensive dataset covering the period from October 8, 2006 to September 30, 2016. Our empirical results suggest that a nonlinear time-varying correlation exists between the markets. We also verify that the third stage of China’s monetary policy reform from 2011 to 2016 had a greater influence on both small and large foreign exchange (FX) market fluctuations. Using the multifractality analysis, we conclude that China’s monetary policy can significantly reduce the multifractality of cross-correlations between the RMB exchange rate and Shibor rate markets, and that market efficiency in the third stage of policy reform is improved. Furthermore, the source of multifractality of cross-correlations is found mostly in the nonlinear correlation and fat-tailed probability distribution (PDF) components.

The Time-Varying Effects of Monetary Policy on House Prices in China: An Application of TVP-VAR Model with Stochastic Volatility

The boom of housing market in China in recent years has attracted great concerns from all over the world. How monetary policy affects house prices in China becomes an essential topic. This paper studies the time-varying effects of monetary policy on house prices in China during 2005.7-2017.10, by using a time-varying parameter VAR model. This paper obtains three interesting results. First, there are time-varying features of the responses of house prices to monetary policy shocks half-year and 1-year ahead, no matter through interest rate channel or through credit channel. Second, interest rate channel and credit channel have been enhanced since financial crisis in 2008. Third, the responses of nominal house prices to monetary policy in China are mainly driven by the responses of real house prices, instead of inflation. Finally, this paper gives proper suggestions for each finding respectively to central bank in China.

Onshore and Offshore Renminbi Price Differential: Impact of Market Sentiment and Policy Reforms

This paper investigates the reaction function of the Chinese central bank, focusing on the variation in money supply as the main instrument for monetary policy. Monthly series are used for the 01/2000-12/2016 timeframe. Results show that the Chinese monetary policy displayed countercyclical reactions to prices and economic activity. On the contrary, it has been accommodative regarding equity prices, while fluctuations in the nominal effective exchange rate are found to be non-significant. A rolling window approach reveals that this has not been constant over time. Attention to growth was lower at the beginning and the end of the timeframe, while prices always remained at the foreground. Amongst major reforms, we show that the Shanghai-Hong Kong Stock Connect has had a significant impact on the conduct of monetary policy in China. We also empirically evaluate the effects of monetary policy through a vector autoregressive model. Impulse responses show that a monetary shock has a positive impact on prices and output. The effect on equity prices and the nominal exchange rate is not significant.

The impact of shadow banking on the implementation of Chinese monetary policy

This paper empirically analyses the relationship between the shadow banking system and implementation of monetary policy in China using the VECM methodology. We show that an increase in the size of shadow banking sector increases the independence of bank lending from the policies of the People Bank of China. We also find that Shadow Banking works in an asymmetric fashion in that it amplifies increases in the money supply but weakens the effects of restrictive interest rate-based monetary policy decisions.

Signaling through government subsidy: Certification or endorsement

We document the credit transmission channel of monetary policy in China by examining the signaling effect of government subsidies on the credit transmission process. We divide the signaling effect of government subsidies into a certification effect (indicating that firms have good quality) and an endorsement effect (indicating that firms have the recessive guarantee of government). Our results show that banks pay more attention to the endorsement effect of government subsidies when they make credit decisions, especially during tight money periods.

The Nexus of Monetary Policy and Shadow Banking in China

We study how monetary policy in China influences banks’ shadow banking activities. We develop and estimate the endogenously switching monetary policy rule that is based on institutional facts and at the same time tractable in the spirit of Taylor (1993). This development, along with two newly constructed micro banking datasets, enables us to establish the following empirical evidence. Contractionary monetary policy during 2009–2015 caused shadow banking loans to rise rapidly, offsetting the expected decline of traditional bank loans and hampering the effectiveness of monetary policy on total bank credit. We advance a theoretical explanation of our empirical findings. (JEL E32, E52, G21, O16, O23, P24, P34)

The effectiveness of monetary policy in China: Evidence from a Qual VAR

Analyzing monetary policy in China is not straightforward because the People's Bank of China (PBoC) implements policy by using more than one instrument. In this paper we use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China. The model acknowledges that policy announcements are endogenous and summarizes policy by a single indicator. The Qual VAR allows us to study the impact of monetary policy in terms of unexpected changes in these latent variables, which we identify using sign restrictions. We show that the transmission of monetary policy impulses to the rest of the economy is similar to the transmission process in advanced economies in terms of both output growth and inflation despite a very different monetary policy framework. We find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool. We also find that the impact of monetary policy shocks is asymmetric in terms of asset prices, that is, the asset price reactions differ in their sensitivity to tightening shocks and easing shocks, respectively. In particular, an easing of monetary conditions boosts stock prices while a tightening shock leaves stock prices unaffected. This shows that monetary policy is not a suitable tool to stabilize asset prices, which raises implications for financial stability and macroprudential policy.

Confidence in Chinese monetary policy

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.

Application of <i>SARIMA</i> Model on Money Supply

In the paper, the data of the narrow money supply of China from January 2005 to March 2016 as sample, model is established by using Eviews6.0. Upon inspection, the model has good fitting effect (MAPE = 1.09) and high prediction accuracy. According to the results of the model, the paper forecasts the development trend of the narrow money supply of China and puts forward some suggestions to provide reference for monetary policy of China.

Nonlinear monetary policy and macroeconomic stabilization in emerging market economies: Evidence from China

This paper provides a new approach to investigate monetary policy nonlinearities within a micro-founded DSGE model by incorporating a transition function into the traditional Taylor rule. The model is estimated using the Bayesian method for the Chinese economy over the period 1998–2013. The empirical results show that the central bank of China actually adopts a nonlinear Taylor rule and pursues an inflation target zone of [1%, 5%] rather than sticking to a rigid target. Further results from impulse responses and welfare comparisons suggest that economic stabilization is an important motive in the conduct of monetary policy in China and the adoption of a nonlinear rule seems to serve this goal better than the traditional linear rule.

The Effectiveness of Monetary Policy in China: Evidence from a Qual VAR

Analyzing monetary policy in China is not straightforward because the People’s Bank of China (PBoC) implements policy by using more than one instrument. In this paper we use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China. The model acknowledges that policy announcements are endogenous and summarizes policy by a single indicator. The Qual VAR allows us to study the impact of monetary policy in terms of unexpected changes in these latent variables, which we identify using sign restrictions. We show that the transmission of monetary policy impulses to the rest of the economy is remarkably similar to the transmission process in advanced economies in terms of both output growth and inflation despite a very different monetary policy framework. We find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool. We also find that the impact of monetary policy shocks is asymmetric in terms of asset prices, that is, the asset price reactions differ in their sensitivity to tightening shocks and easing shocks, respectively. In particular, an easing of monetary conditions boosts stock prices while a tightening shock leaves stock prices unaffected. This shows that monetary policy is not a suitable tool to stabilize asset prices, which raises implications for financial stability and macroprudential policy.

Impact of the joint-stock reform of commercial banks on the effectiveness of monetary policy in China

Over the past decade, the Chinese government has conducted the joint-stock reform of state-owned commercial banks. The joint-stock reform improves the marketization level of the ownership structure of commercial banks and consequently leads to impacts on the effectiveness of monetary policy. This paper first presents the impacting mechanisms of the joint-stock reform of commercial banks on the effectiveness of monetary policy and then constructs an empirical model to test those impacts. The empirical results show that the increasing degree of joint-stock reform of commercial banks enhances the effectiveness of expansionary monetary policy but weakens the effectiveness of contractionary monetary policy in China.