From a Quantity to an Interest Rate‐Based Framework: Multiple Monetary Policy Instruments and Their Effects in China

Abstract

This paper investigates the effects of various monetary policy instruments in China with the structural vector autoregression model. Empirical results are as follows. The effects of benchmark lending rate and short-term interest rate shocks are larger than those of reserve requirement ratio shocks. Nonpolicy shocks exert substantial effects on intermediate targets under a quantity-based policy framework. The size and effects of short-term interest rate shocks in recent years are large. Short-term interest rate shocks have strong effects on property prices. These results suggest that the new interest rate-based policy framework is more effective than the previous quantitybased policy framework.

Impact of Short-Term Expansionary Monetary Policy on the Economy Based on the Keynesian ModelChinas Monetary Policy in the Post-Epidemic Era as an Example

“…Thus, it follows that an increase in the nominal money supply will inevitably result in an increase in real income or total output as well as a decrease in interest rates. The People's Bank of China has been implementing expansionary monetary policy since 2023 in an effort to boost the money supply to improve the economy [8]. The bank extensively employed a variety of strategies in the first half of 2023, including reserve requirement ratio reductions, re-lending and re-discounting, medium-term lending facilities (MLF), and open market operations, to precisely and successfully raise the money supply, preserve systemic liquidity, and encourage financial support for entities [9].…”

Global Spillovers of China's Monetary Policy

“…In general, the money supply's growth rate or short-term interest rates used to be proxies for China's monetary policy. However, some assert that changes in a single aspect of monetary policy fail to identify shocks, especially with China's monetary policy shifting from being predominantly quantity based to interest-rate based (Kim and Chen, 2019). Accordingly, following Steinsson (2018a, 2018b), and Gertler and Karadi (2015), we construct an external instrument to assess monetary policy shocks using changes in 7-day repo rate in the interest rate swap market.…”

Monetary policy as market stabilizer in the COVID-19 pandemic

“…As part of this transition, short-term interest rates, open market operations, short-term liquidity tools, and medium-term lending facilities have been integrated into the monetary policy toolbox. This important policy transition has received great attention from academic researchers, who typically focus on the effectiveness of quantity versus price rules in macroeconomic policy ( Zhang, 2009 ; He and Wang, 2012 ; Li and Liu, 2017 ; Xu, 2018 ; Li and Wang, 2020 ; Kim and Chen, 2022 ).…”