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Monetary policy in China: A Factor Augmented VAR approach

Author

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  • Yemba, Boniface
  • Kitenge, Erick
  • Tang, Biyan
  • Gaekwad, Neepa B.

Abstract

This paper investigates the effectiveness of Chinese monetary policy. We employ the data-rich Factor Augmented VAR (FAVAR) model to address the paucity of Chinese data. We find that the Divisia monetary aggregate M2 (DMA2) that considers both the quantity of monetary assets and the user-cost of the money/forgone interest rate is more effective in boosting economic activities and prices than other instruments (e.g., interest rate, simple money supply M2, and required reserve ratio). These other instruments produce outcomes that contradict theoretical predictions in at least one area. Therefore, we suggest the use of the DMA2 to steer the performance of the Chinese economy effectively.

Suggested Citation

  • Yemba, Boniface & Kitenge, Erick & Tang, Biyan & Gaekwad, Neepa B., 2024. "Monetary policy in China: A Factor Augmented VAR approach," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 975-1008.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:975-1008
    DOI: 10.1016/j.iref.2023.07.088
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Monetary policy; FAVAR; Chinese economy;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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