The Effectiveness of China’s Monetary Policy: Based on the Mixed-Frequency Data

Abstract

After the period of rapid growth, the Chinese economy has entered the -new normal‖ stage. This is a sign of the expected slowdown in economic growth. In the course of development, has the effectiveness of China's monetary policy changed? Which of quantity and price rule monetary policies is more suitable for China's economy? Very few researches focus on these questions, and this paper constructed a novel Mixed-Frequency Bayesian Factor Augmented Vector AutoRegression (MF-BFAVAR for short) model by combining the dynamic factor model, mixed-frequency spirit, Bayesian estimation, and factor augmented vector autoregression to find the answer. And we applied three different frequencies of data, in order to get the best estimated results. The conclusion is that price rule monetary policy is suitable for the period of steady development, and when economic growth suffers fluctuations, quantity rule monetary policy has better performance. Therefore, monetary policymakers should formulate the most effective policy based on different situations. Contribution/ Originality:This study is one of the very few researches on the effectiveness of China's monetary policy under the -new normal‖ situation. And we construct a novel methodology framework, MF-BFAVAR, which is, as far as we know, the first time to take advantage of the dynamic factor model, mixedfrequency spirit, Bayesian estimation and factor augmented vector autoregression at the same time. Unlike the existing literature, we applied data at three different frequencies (quarterly, monthly and daily) in our estimation. INTRODUCTIONChina, as one of the world's most notable economies, has achieved amazing economic development. Since the year of 2014, the growth rate of China's GDP has been turned from -high‖ to -medium high‖. One obvious sign is that expected growth rate of GDP have been downshifted from around 10% to a 6-7%. The Chinese President Xi Jinping applied the term -new normal‖ to describe the situation in 2014. Since then, it has been used not only to describe slower economic growth, but also to describe the changes taking place in China's economy generally, such as intelligent manufacturing, poverty eradication, stricter environmental regulations (Abdul-Rahaman & Yao, 2019;