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The Asymmetric Transmission of China's Monetary Policy

Author

Listed:
  • Tao Zha

    (Federal Reserve Bank of Atlanta)

  • Kaiji Chen

    (Emory University)

Abstract

China monetary policy, as well as its transmission into the economy, is yet to be understood by researchers and policymakers. We propose a new estimation method and use it to quantify the monetary transmission of China's monetary policy within the endogenous-switching nonlinear SVAR framework. We find strong evidence that contributions of monetary policy shocks to the GDP fluctuation are asymmetric across different states of the economy. The effect of monetary policy on output is supported more by medium and long term bank loans than by short term bank loans. This is especially true for the shortfall state, in which an increase of M2 is channeled disproportionally into MLT loans. These findings highlight the role of M2 growth as a primary instrument and the bank lending channel to investment as a key transmission mechanism for monetary policy. Our analysis shows that China monetary policy has unbalanced effects on consumption and investment.

Suggested Citation

  • Tao Zha & Kaiji Chen, 2017. "The Asymmetric Transmission of China's Monetary Policy," 2017 Meeting Papers 516, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:516
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    References listed on IDEAS

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