Monetary shocks to macroeconomic variables in China using time-vary VAR model

ABSTRACT

This study is the first attempt to apply TVP-VAR model to analyse the effects of China’s monetary shocks on macroeconomic variables. 3D impulsive response functions indicate that monetary shocks did affect GDP, CPI and exchange rate over 1996Q1-2016Q4 either in short-run or long-run in China. Our study has important policy implications for the Chinese government conducting monetary policy to sustain its economic growth and maintain economic stability.

KEYWORDS:

• Macroeconomic variables
• time-varying VAR
• 3D impulsive function
• monetary shocks

JEL CLASSIFICATION:

• C32
• E42
• E52

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Data are from National Bureau of Statistics of China.

² We do not find any cointegration among our four variables. Results are available upon request.

³ The impulse-response analyses require a choice of Cholesky order. The Cholesky orders for the models were set by M2->Interest Rate->Exchange Rate->GDP.

⁴ Details regarding the estimation, transformation, and setting of the prior for the time variation of the coefficients such as$\tau$(training sample), $K_Q,K_W$ and $K_S$, see Franta, Horvath, and Rusnak (2014).