Differential Effects Of Monetary Policy In China
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Date
2015-02
Authors
XIAOHUI, GUO
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Abstract
China is a huge country with great regional disparity. Common monetary policy would have different impacts across regions which may enlarge regional disparity. Therefore, the objective of this study is to examine and propose solutions to reduce the different regional effects of monetary policy. Firstly, this study uses vector autoregressive model to gauge the effects of monetary policy after accounting for spillover in China from 1978-2011. The results confirm that monetary policy exert different impacts across regions. Spillover effect is very important since it can significantly amplify the magnitude of regions‘ responses to monetary policy shock. Subsequently, this study explores the factors, with a special attention on the role of small banks, which cause the differential effects of monetary policy using provincial data. The results show that bank lending channel works in China, implying that China‘s Central Bank should provide more assistance to small banks. In addition, this study examines the effect of specific tool introduced after the earthquake in Sichuan on growth of counties in this province. The results prove that the differentiated reserve requirement ratio can significantly help the disaster-stricken areas to gain more growth. From these findings, the inefficiency of monetary policy can be further improved by offering specific growth-enhancing instruments such as differentiated reserve requirement ratio. Thus, other possible instruments can be time to time introduced to support the development of the Middle and/or Western regions in order
to reduce the regional differential effects of monetary policy and promote a more balanced regional economic development.
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Keywords
Differential Effects Of Monetary , Policy In China