Financial Factors,Openness and the Natural Interest Rate in China

China's financial market has undergone significant changes since financial deleveraging commenced and regulatory supervision was tightened in 2017. Intensifying China–US trade tensions have further increased the uncertainties of external environments. In this article, we use a Bayesian approach instead of the standard maximum likelihood estimation in the Laubach–Williams model to estimate the natural interest rate by considering financial factors and open conditions, and analyze the relationships among the natural interest rate, economic activities and monetary policies. We find that technological and demographic factors are the main drivers of natural interest rates, while financial factors and open conditions also play important roles. In particular, shocks in the financial markets and the external economic environment in recent years are important reasons for the decline of China's natural interest rate. Therefore, it is necessary to strengthen research on the estimation of the natural interest rate to ensure China's transformation into more price‐based monetary policy and high‐quality development.     

Optimal Monetary Policy in China

Using the structural vector autoregression model, we estimate the current responses of monetary policy to contemporaneous shocks from macroeconomic variables. Our findings indicate that the People's Bank of China responded to inflation and output changes, but did not react to asset price fluctuations during the period from January 1997 to March 2010. The optimal monetary responses to exogenous shocks are also examined. It is revealed that using asset prices to formulate monetary policy would not help to improve monetary authorities' performance in lowering the volatilities of output growth and inflation while keeping output growth and inflation in their safety zones. The effectiveness of monetary policy and fiscal policy in reacting to external shocks is also discussed.     

China's monetary policy surprises and corporate real investment

We evaluate the effect of China's monetary policy shocks on corporate real investment. We propose a new approach to identify China's monetary policy shocks using high-frequency surprises based on treasury futures around monetary policy announcements as external instruments. We then estimate the dynamic effect of monetary policy shocks on corporate real investment using a rich firm-level data of all listed non-financial firms in China. We find that an unexpected monetary policy easing boosts firms' investment expenditures with heterogeneous dynamic responses across firms: small-sized firms have quicker responses than large-sized firms, especially for non-state-owned enterprises (non-SOEs). We show that sales revenue response could be the channel through which monetary policy shock transmits to non-SOEs' investment expenditures in China.     

Openness and the Effects of Fiscal and Monetary Policy Shocks on Real Output in Nigeria (1960–2003)*

Abstract: This study investigates the effects of monetary and fiscal policies on the real output growth in a small open economy. It is a country‐specific, time series study that verifies the implication of increasing economic openness on the efficacy of monetary and fiscal policy. A modified GARCH model was used to estimate the anticipated and unanticipated shocks. Two measures of fiscal and monetary shocks were combined with openness and real oil price shocks in a VECM model to assess the effects of anticipated and unanticipated policy shocks on the output equations. The empirical results showed that anticipated and unanticipated fiscal and monetary shocks had no significant positive effects on real output. This suggests that the open macroeconomic version of the policy ineffectiveness proposition was valid for both monetary and fiscal policy shocks in Nigeria. This is in consonance with earlier works in this area. Furthermore, the degree of openness and oil price shocks had a negative implication on the efficacy of macroeconomic policy in Nigeria; also in agreement with the Dutch Disease Syndrome. Finally, the policy implication of this study therefore is that trade liberalization policy should be implemented cautiously. The Nigerian economy is weak to withstand the unwholesome consequences of full economic integration.     

Have cross-category spillovers of economic policy uncertainty changed during the US–China trade war?

This study investigates the interconnection of policy uncertainties between the world’s two largest countries, the US and China, and sheds light on whether and how the US–China trade war affects each party. Given the deep-seated economic integration and trade linkage between the two countries, these characterizations are essential for understanding how policy shocks propagate spatially. Using fiscal, monetary, and trade policy data from January 2000 to December 2019, I provide ample evidence of bilateral, multilateral, and system-wide measures of policy uncertainty connectedness. Monetary policy is most likely to be the leader of policy uncertainty in China, while fiscal policy is more likely to be the leader in the US. The cross-category connectedness is not constant over time. Overall, the direction of spillover is from the US to China, although this changes in different periods owing to different environments. These findings are useful for policymakers to monitor the effectiveness of policies and to help investors avoid economic policy uncertainty shocks induced by return fluctuations.     

公共政策影响中国地区工业集聚了吗？——来自省级数据的证据

既有研究表明,政府政策对产业集聚存在显著影响。而在转轨期中国,政府政策行为涉及财税政策、产业政策、土地政策、公共服务政策,以及部分地区政府直接参与地方经济的投资活动等多样化内容形式。通过考察中国现阶段地区工业集聚呈现的新特点,即地区工业集聚差距呈现先扩大后缩小、地区工业集聚程度降低态势;探讨政府差异化的政策行为对中国地区工业集聚的内在影响;并基于2003-2011年省际面板数据予以实证。研究发现：不同的政府政策对中国工业集聚的影响不同;对外开放政策、产业政策、公共服务政策有利于地区工业集聚;财政政策对地区工业集聚存在负向作用;而土地政策以及东部沿海地区虚拟变量和直辖市虚拟变量,对地区工业集聚发挥的作用并不显著。     

Where is the beef? The costs of American aid and wartime China's hyperinflation

Upon the outbreak of the Pacific War (December 1941), the United States expanded its military assistance to allied nations including China under the “Lend-Lease Act”. However, the US defaulted the payment for their staff dispatched to and stationed in China which forced China to make huge sums of advance payment. The total costs of American military presence in China, including China's Reverse Lend-Lease contribution as a return to US military aid, amounted 15% to 22% of China's total fiscal expenditures. Since the beginning of 1937, the price indices increased only 200% by 1941 but rocketed to 1600 times by 1945. We develop a dynamic Fiscal Theory of Price Level (FTPL) to capture the relationship between fiscal shocks and price level. Our DSGE model shows that seigniorage (fiscal demand) driven inflationary monetary policy can lead to some hyperinflation that can be predicted and quantified. We then empirically examine the relationship between fiscal expenditures and inflation levels using provincial panel data 1937–1945. The estimation results show that local price levels increased 1.6% to 3.7% for every 10% increases of China's advance payment to US troops.     

Energy price shocks,monetary policy and China's economic fluctuations

This paper develops a New Keynesian dynamic stochastic general equilibrium model with energy factors to study various channels through which China's economic fluctuations are linked to energy price shocks and to search for the optimal monetary policy to cope with energy price shocks. We conclude that there are channels through which changes in energy prices will have the following cause–effect relationships. First, a rise in energy price as a negative technology shock will raise the costs of providing capital services per unit of capital, thereby reducing output. Second, a rising energy price distorts the intertemporal choices of households and firms, creating downward pressure on the expected future return on capital. Third, an energy price shock places upward pressure on the marginal costs associated with an increase in inflation. Numerical simulation results show that a positive energy price shock has a positive effect on energy technology improvements. In addition, the effects of energy price shocks can be mitigated by nominal rigidities, and interest rate rules will determine the magnitude of those effects. Using the efficient frontier method, we also show that optimal monetary policy in China should help control energy price volatility.     

Synchronization of regional growth dynamics in China

In this paper, we document significant evidence of time-varying synchronization of the regional growth dynamics within China. Using a dynamic factor model extended with time-varying loading parameters and stochastic volatility, we observe a substantial amount of time variations in the loading parameters of the common factor– implying that the exposure of regional growth to the common national factor varies substantially. We find that the correlation in cross-region economic growth performance increased during the recent global recession and declined post-recession, albeit still at a higher level than before 2008. While the large degree of synchronization of regional growth dynamics permits the central government or central bank to implement a uniform fiscal or monetary policy, this concurrently reduces China's ability to stymie the propagation of external shocks and instead increases systemic risks across regions.     

Dilemma of the Silver Standard Economies: The Case of China

Exchange rate commitments implied in the silver standard originally anchored China's monetary policy and the inflation rate in the early republican period. It was believed that China's free silver standard acted as a natural check on the excessive issuing of notes by warlords and local governments. This consensus view, however, overlooks the fact that the silver standard was inherently unstable because it left no room for monetary policy to stabilize output and inflation. This article employs a formal structural model to show that a fiat currency unlinked to fluctuations in the price of silver that allows government to implement self‐adjusting monetary policies would further stabilize China's output and inflation.     

On the choice of monetary policy rules for China: A Bayesian DSGE approach

Motivated by the institutional features of China's monetary policy, this paper aims at identifying the most data favored monetary policy rule for China within a dynamic stochastic general equilibrium (DSGE) model framework. In a canonical New-Keynesian DSGE model, we carry out a positive analysis by employing Bayesian methods to estimate three main categories of monetary policy rules, namely a Taylor-type interest rate rule, a money growth rule and an expanded Taylor rule with money. Based on China's quarterly data from 1996Q2 to 2015Q4, our estimation shows that the expanded Taylor rule obtains the best empirical fit to the data. Moreover, impulse responses and forecast error variance decompositions demonstrate that monetary policy rules with or without money provide very different implications for the policy behavior. Our results ultimately suggest that money has so far been more closely targeted than nominal interest rate and still plays an important role as a monetary policy target in China. Furthermore, a conventional Taylor-type interest rate rule is not good enough yet to describe China's monetary policy behavior.     

Macroeconomic effects of uncertainty shocks: Evidence from Korea

This paper proposes a new measure of economic policy uncertainty (EPU) for Korea by fine-tuning the keywords and exploiting information drawn from a wide variety of local newspapers. The uniqueness of our new EPU index lies mainly in the fact that it uses a set of keywords that correspond much more closely to actual language use and better reflect the economic environment of Korea, which is classified as a small open economy. After shocks to EPU being identified, we employ these shocks to estimate the impulse responses using local projections. Unlike the existing measure, our results show that shocks to EPU lead to a significant decline in macroeconomic aggregates such as output, consumption, investment, and employment. Thus our results suggest a refinement of the EPU index in general for other countries accordingly. We also develop policy-specific uncertainty indices and show that they capture important historical events related to the corresponding policies, such as monetary and fiscal measures.     

The driving forces of China's business cycles: Evidence from an estimated DSGE model with housing and banking

We study the approximate sources of China's business cycles in an estimated dynamic stochastic general equilibrium (DSGE) model with housing and banking. The model replicates well the volatility and cyclicality of key macroeconomic variables observed in the past two decades in China. A host of shock decomposition exercises demonstrate that, among the shocks being considered, both financial and housing shocks are driving China's business cycles, accounting for a particularly large fraction of the variance in most macroeconomic and financial variables at the business cycle frequencies. In particular, the capital quality, housing demand, and loan-to-value shocks display prominent contributions to the business cycle fluctuations. Moreover, there exists substantial interactions between the banking and housing sectors in China, where the collateral constraint and the financial constraint amplify with each other. The results shed new light in the understanding of China's business cycles, and may serve as a useful benchmark for future quantitative analyses of China's macroeconomic fluctuations using DSGE frameworks.     

Impact of the Global Financial Crisis on China： Empirical Evidence and Policy Implications

This paper applies a structural vector autoregression analysis to quantify the impact of the global financial crisis on China. It is found that the impact is indeed sizeable： a 1-percent decline in economic growth in the USA, the EU and Japan is likely to lead to a0. 73-percent decline in growth in China. The article discusses whether the current measures of fiscal stimulus are adequate to offset the sharp decline in external demand Although there is little doubt that the massive fiscal stimulus will largely offset the significant shortfalls in external demand, the current growth pattern in China will be increasingly unsustainable in the long term. China ＂s reform cycles suggest that external shocks are often opportunities for structural reforms. Therefore, the crisis could also be a catulyst for rebalancing China ＇s economic structure so as to return the economy to a sustainable path.     

财政政策与货币政策的动态搭配和组合模式

基于经济周期的不同阶段,从IS-LM曲线和供求理论的双重视角解析利用财政政策与货币政策对宏观经济进行调控的内在机理,揭示两类政策搭配组合的理论逻辑,分析制约财政政策与货币政策调控效应的现实因素。研究发现,财政政策与货币政策的搭配组合要根据经济发展的不同阶段进行动态供给,以满足经济周期不同阶段的需求,如此方能实现经济的稳定增长。现阶段,我国应采取“更加积极的财政政策与稳健适度的货币政策”这一政策组合。产品市场与货币市场对利率的弱敏感性使政策刺激经济的效果受到制约,因而两类政策不仅要在总量层面“对冲”经济增速减缓的压力,而且要在结构层面增强协调性。     

International Financial Adjustment for China： A Financial Valuation Approach

International financial adjustment is the process whereby valuation shifts from asset price and currency changes result in relatively durable net wealth transfers across countries' international balance sheets. This paper applies a financial valuation approach to estimate the direction and the broad extent of recent international financial adjustments on China's international balance sheet. We estimate China's international balance sheet losses resulting from the valuation shifts over the period 2005–2010 and reveal that international currency shifts over the past decade have also generated a range of non‐balance sheet financial and monetary adjustment pressures for China. This paper also evaluates how China's evolving international financial policy arrangements could better mitigate China's exposure to international financial adjustments. These arrangements include a more effective currency mechanism and the mechanisms to internationalize the RMB to buffer international financial valuation shocks.     

Monetary services and money demand in China

Using Barnett's methodology, we construct a monetary services index (MSI) for China. Compared to the traditional simple money aggregates, this index has solid microeconomic foundations, and has consistent variables. With China's on-going economic reforms in full swing, this index may provide a more appropriate indication of the current rapid process of economic monetization and financial innovations. In addition, we that it is capable of using the MSI to replace the conventional simple-sum aggregates in estimating long-term money demand. This may provide attractiveness for the People's Bank of China (PBC) to include the index as an alternative target variable in concluding its monetary policy during the period of rapid economic transition.     

Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.     

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub‐Saharan Africa

The paper examines the monetary policy actions through which central banks in sub‐Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.     

Renminbi Internationalization in the New Normal: Progress,Determinants and Policy Discussions

In the present paper we explore the internationalization of the renminbi with reference to the experiences of other monetary powers, and discuss its determinants, prospects and implications for China's development in the “new normal.” Specifically, after summarizing the major progress made thus far, we conduct a regression analysis, showing that economic size and financial conditions are significant determinants of the international currency status, while inertia and other unobserved factors also play important roles. These empirical findings enable us to undertake a scenario analysis focusing on the renminbi's potential to become a global reserve currency. Based on this quantitative research, we then revisit China's policy initiatives designed to promote its currency overseas. In our view, the internationalization of the renminbi, along with financial deepening and liberalization, should be regarded as a means to achieve China's goal of reaching a more sustainable and balanced model of development.