Deconstructing the Effects of SARS on China’s Real Economy: What are the Lessons for Monetary Policy?

ABSTRACT

This study examines the effects of the SARS outbreak on China’s real economy using structural vector autoregression models. We find that SARS has had both temporary and persistent adverse effects on output. The temporary effects lasted for only one-quarter and the prolonged effects for approximately two years. By further analyzing China’s monetary policy, we find that the accommodative quantity-based monetary policy has greatly hedged the temporary effects of SARS. However, the persistent effects of SARS could have been alleviated if China had eased the price-based monetary policy after the outbreak.

KEYWORDS:

• SARS
• monetary policy
• structural VARs
• structural parameters

JEL CLASSIFICATION:

• E32
• E58
• I12

Acknowledgements

We thank the editors and the anonymous referees for their helpful suggestions. We also thank participants of the online symposium on the theme “Pandemics: Lessons from an Economics and Finance Perspective” for comments. All errors remain our own. Ding Liu would like to thank the financial support from the National Natural Science Foundation of China (Grant NO.71601160).

Declaration of interest

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. The M2 growth rate kept rising, from 15.4% in Q3 2002 to 20% in Q2 2003. According to the People’s Bank of China’s 2002 monetary policy report, the reason the People’s Bank of China eased the quantity-based monetary policy is to prevent deflation and contain the unemployment rate.

2. For the coefficients corresponding to ${\rho }_m{\gamma }^{\pi }$ and ${\rho }_m{\gamma }^y$, we divide these coefficients by ${\rho }_m$ to obtain ${\gamma }^{\pi }$ and ${\gamma }^y$, respectively.

3. In this study, we set the location parameter to 0 and the scale parameter to 1.

4. DR007 refers to the 7-day interbank bond collateral repurchase rate for depository institutions. Repo and DR007 have a correlation of 0.95 for quarterly data and 0.91 for monthly data.

5. According to Chen, Zheng, and Yao (2016), the bank lending channel to investment is the key transmission mechanism for China’s monetary policy. Therefore, we conduct a 5-variable study that adds a real investment variable to the baseline model. The results show that the response of investment to the QMP shock is large but temporary while that to the PMP shock is smaller but persistent.

6. We set the date of the outbreak as Q1 2003 because WHO delivered the global warning and named SARS in March 2003. With regards to the end of SARS, mainland China discharged the last two SARS patients in Q3 2003 and stopped the reporting of SARS suspected cases in Q3 2004. For more details, please refer to http://en.people.cn/zhuantwe/Zhuanti_335_11.shtml.

7. In brief, the critique suggests that a strong policy intervention would affect the behavior of the public and thereby change the parameter of the model. In such cases, it would be inappropriate to conduct the analysis basing on the original parameters.

8. For comparison, we use the aggregate effect of the structural shocks instead of the actual value to show the variation in output growth. The aggregate effect and actual value have a correlation of 0.96.

9. Repo was well above 2% from Q2 2003 to Q4 2004; thus, the zero lower bound will not binding if the PBC extra-decreases Repo by 100 basis points.

10. The prior for the added coefficient is $t\left(0,1,3\right)$, which denotes a Student’s $t$ distribution with location parameter 0, scale parameter 1, and 3 degrees of freedom.

11. We also conduct several other sensitivity analyses, which include using a 4-lag SVAR, setting the scale parameter to 1 for all the prior densities, and discarding the sign restrictions on the supply shocks. The results are also robust to these specification changes.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [No. 71601160].