Econometric Study On The Existence Of "Bernanke's Puzzles" Of Monetary Transmission In China

In a New Keynesian economy with no financial friction, interest rate channel is the only monetary transmission channel. However, enormous experiences and facts concluded from real economy are contrary with the expectations of this model, which is reflected in magnitude puzzle, timing puzzle and composition puzzle. To specify, magnitude puzzle means that innovations of monetary policy is extremely influential in terms of various variables in real economy while less influential regarding interest rate. Timing puzzle could be understood as that when the prime interest rate is approaching to initial level, real economic variables keep changing under the impact of unexpected monetary policy. Composition puzzle emphasizes on the significant effects of monetary policy on long-term asset investment, which is controlled by long-term interest rate, although compared with its effects on short-term interest rate, its effects on long-term interest rate are relatively less influential. The existence of these three puzzles implies that there are possible alternative explanations of monetary transmission channels in macro-economy. In addition, studies showed that specific characteristics of these three puzzles are closely related to certain national financial structure and this is especially applicable for developing countries such as China. On October 24 th, 2015, PBC reduced the deposit interest again as well as eliminated the deposit rate cap, which signified that interest rate liberalization is nearly completed in China. As a result, in the context of interest rate liberalization entering a new stage, it is important to probe into the question that whether Bernanke's three puzzles exist in China or not and if exist, how these puzzles will change along with interest rate liberalization reform in China.For this purpose, in this paper, firstly, the importance of effects of traditional interest rate channel on monetary policy transmission will be measured through the estimation of values of resilience between components of GDP a nd interest rate. Then, taking advantage of impulse response technique of SVAR, the impact of monetary policy in C hina on various real economic variables will be investigated. Finally, by comparing studies done by Bernanke etc., the conclusion that Bernanke's three puzzles is existing in the context of C hinese economy will be drew. At the same time, in order to explore Bernanke's three puzzles that embodied in the process of interest rate liberalization reform in China, index designed for measurement of interest rate liberalization will be constructed and successively introduced into the benchmark model as an exogenous variable. It will be concluded that in various degrees, the effects of these three puzzles will gradually become weak along with the development of interest rate liberalization reform in C hina. Moreover, according to the results of a robust analysis, it will be proved that conclusions drew above are robust.