To Measure The Effect Of Monetary Policy Since The 2008 Financial Crisis

In this paper, we depict the background that the Central Bank of China havebeen implementing it’s moderately easy monetary policy to prevent decline ofeconomy since the outbreak of financial crisis in2008, at first. And then, present thequestion of how to measure the effect that the monetary policy have inflicted upon thestructure of macro economy.Therefore, we make a detailed summary of the primary approaches which hadbeen used in the past research. An approach called Vector Auto Regression plays avery important role in these primary approaches. In this paper, we explain theprogress of constructing, identifying, estimating and forecasting an ordinary model ofVAR. There exists some flaws of the VAR approach, though it has made a greatsuccess in the research of macro economy. Such as the condition of constrain toidentifying is rarely conceivable, and the excessive parameterizing always leads amodel of large scale hardly feasible. Furthermore, if we decrease the number ofvariables, it can lead to an information loss of the real structure of macro economy.To handle the problems of VAR approach presented above, Bernanke have raiseda new approach named Factor Augmented Vector Auto Regression. This newapproach have solved the above mentioned problems effectively, and have made abetter result in the empirical research. It first extract common factors which comprisemost information that included in the original data set from the given data set, andthen, let these factors along with the variable of policy enter the standard model ofVAR. In this paper we explain the framework, identifying, and estimating of thisFAVAR approach in detail. Moreover, we operate an empirical research on macroeconomy of China using the monthly data from Dec.2008to Mar.2013byimplementing this FAVAR model to measure the effect of monetary policy. We havesome meaningful conclusions. For example, the easy monetary policy has boosted theoutput as well as the quantities of export, but it has also led to a rise of CPI as a toll. We have further discovered that, pertaining to the CPI, there exists differencebetween the citizen and people who live in rural area. People who live in the ruralarea seems performing more immune to the monetary policy.