An Empirical Study On Monetary Policy Transmission Mechanism In China During The Transformed Period

Based on the theories analysis, this paper empirically studies the monetary policy transmission channel during the 1994 to 2002 sample period in which the monetary policy was transformed from being directly-controlled to being indirectly-controlled by the central bank in China, finally the conclusion and policy implications are made. This paper consists of six parts. The fist part presents the study aims and meaning, the main working and structure of the paper. The second part summarizes the general analysis frame of mechanism of monetary policy transmission, and reviews the theories, among which are mainly the money channel theory and credit channel theory. The third part reviews briefly the historical and current the status of monetary policy transmission in China. Aimed to evaluate the monetary policy transmission of China in transformed period objectively, the fourth part empirically studies the quarterly economic and financial data between 1994 and 2002. It follows the Granger Test based on the Vector Auto-regression Model to estimate if the monetary supply and credit will Granger cause general output respectively. It investigates the different effects of the monetary channel and credit channel on the macro-economic using the Least Square. It also applies the Impulse Response Function to estimate the impact of monetary policy on the representative index of the leading channel in China's monetary policy transmission. The results show that the money channel and the credit channel are both the important channels of Chinese monetary transmission, while the impact of latter on macro-economy is stronger, so the credit channel plays a dominant role in the monetary transmission in China. In the monetary policy impulse response analysis, it finds the impact of monetary policy can affect the price and output in the short term, but it can hardly affect the price in long term. The impact of monetary policy on output exists, but it is also limited. It indicates the impact of monetary policy on the mid- and long-term loan is stronger than that on the short-term loan. The fifth part tries to find the factors that affect the monetary policy transmission in China. The conclusion and the policy implications are made in the last part.