Examining Monetary Policy Transmission in the People's Republic of China–Structural Change Models with a Monetary Policy Index

Paul G. Egan, Anthony J. Leddin
2016 Asian Development Review  
This paper estimates augmented versions of the Investment-Saving curve for the People's Republic of China in an attempt to examine the relationship between monetary policy and the real economy. It endeavors to account for any structural break, nonlinearity, or asymmetry in the transmission process by estimating a breakpoint model and a Markov switching model. The Investment-Saving curve equations are estimated using a Monetary Policy Index, which has been calculated using the Kalman filter.
more » ... Kalman filter. This index will account for the various monetary policy tools, both quantitative and qualitative, that the People's Bank of China has used over the period 1991-2014. The results of this paper suggest that monetary policy has an asymmetric affect depending on the level of output in relation to potential, and that the People's Republic of China's exchange rate policy has restricted the effectiveness of the People's Bank of China's monetary policy response.
doi:10.1162/adev_a_00062 fatcat:3w2bfum32vekdnvnktgo3ur5em