Impacts of Monetary, Fiscal and Exchange Rate Policies on Output in China: A Var Approach

Abstract

Applying the VAR model and using the interest rate as a monetary policy variable, we find that in the long run, output in China responds negatively to a shock to the interest rate, the real exchange rate, government debt, or the inflation rate, and it reacts positively to a shock to government deficits or lagged own output. When real M2 is chosen as a monetary policy variable, long-term output in China responds positively to a shock to real M2 or lagged own output, and it reacts negatively to a shock to the real exchange rate, government debt, or government deficits. Its response to a shock to the inflation rate is negative when government debt is used and is positive when government deficits are considered. In the short run, fiscal policy is more important than monetary policy in three out of four cases. In the long run, monetary policy is more influential than fiscal policy in three out of four cases. Therefore, the government may consider conducting monetary and fiscal policies differently in the short run and long run. The government needs to be cautious in pursuing deficit spending as its long-term impacts depend on the monetary variable employed. The policy of maintaining a relatively stable exchange rate is appropriate as the depreciation of the Yuan may hurt the economy in the short run. Copyright Springer 2004exchange rates, government debt and deficits, impulse response functions, monetary policy, VAR, variance decompositions,

Long‐Run Fiscal Multipliers for Autonomous Prefectures in China

“…Several studies have already examined the relationship between fiscal policy and economic growth in China. For example, Batisse () and Hsing and Hsien () analyse national‐level economic growth and the effects of macroeconomic policies, while He et al . () and Liu () estimate the national‐level fiscal multipliers.…”