China's Monetary Policy Effects:"Price Puzzle" ?

This paper employed a non-recursive SVAR model,which incorporated the fact that the China's monetary policy is significantly affected by the sterilizing operations of its central bank,to study the policy effects of China's 5 main monetary policy instruments including the interbank intere-st rate(7 days weighted average),benchmark lending rate(1 year),required reserve ratio,total loans of RMB in financial institutions and money supply M2 by using the data of primary commodity price index,US federal funds rate and China's value-added industrial production index,consumer price in-dex,foreign reserves,base money and RMB exchange rate against US dollar during the period from Jan,2000 to Dec,2015.The results indicated that the 5 policy instruments are all effective.Both of the positive shocks of total loans and M2 can cause value-added industrial production and consumer price to increase within short time at 10%significance level.More importantly,all the positive shocks of interbank interest rate,benchmark lending rate and required reserve ratio can cause them to decrea-se within short time with no "price puzzle" at 10%significance level,which is almost the opposite of the results of many other empirical studies about China's monetary policy effects.To do the robustness check,this paper redid the relevant parts by choosing different lag orders of the SVAR model,choosing different variables and using the subsample data.All the results are consi-stent with the original.In addition,this paper also employed a recursive SVAR model excluding the variables of foreign reserves,base money and RMB exchange rate against US dollar,which is widely used by many other related empirical studies,to study China's monetary policy effects using the rele-vant data of the same period.The results indicated that almost all the monetary policy effects of inter-bank interest rate,benchmark lending rate and required reserve ratio exhibit "price puzzle" at 10%s-ignificance level,which is consistent with the results of many other empirical studies about China's monetary policy effects.Such results suggested that the "price puzzle" of these monetary policy instr-uments has nothing to do with the research period but with the sterilizing operations of the central bank,which is also supported by the effects of the positive shock of foreign reserves.This paper contributes to the literature by presenting a new empirical evidence which indicated t-hat the "price puzzle" of China's monetary policy effects is possible due to the impact of the sterilizin-g operations of its central bank on the monetary policy instruments as Sun(2015b)suggested.