DP 2023/2 - Qiaoyu Liang, Yihao Xue, Bing Tong: Interest Rate Liberalization, Permanent Technology Shocks, and Macroeconomic Volatility in China

Qiaoyu Liang, Yihao Xue, Bing Tong

CFDS Discussion Paper 2023/2

Abstract

Are technology shocks contractionary or expansionary when interest rates are inflexible? This paper studies this issue based on Chinese data during the interest rate reform. We decompose the technology shock into permanent and transitory components and investigate their macroeconomic effects based on the New Keynesian model and the local projection method. Our empirical results show that interest rate fixation amplifies the effects of permanent technology shocks: a positive shock generates higher output and inflation during the period of fixed interest rates. This result is consistent with the New Keynesian model’s prediction for permanent technology shocks. However, the empirical results for transitory technology shocks are insignificant.

Full Paper as PDF


Please publish modules in offcanvas position.