El-Shagi, Makram / Jiang, Lunan


Although China’s monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy (the largest by some accounts) have often been simple reestimations or recalibrations of models that have originally been designed to describe US or European monetary policy. In this paper, we aim to provide an assessment of Chinese monetary policy and in particular monetary policy transmission through yield curves into the real economy. Our study takes into account the peculiarities of the Chinese economy: Namely, our model includes both China’s modern attempts at a market based policy shock as well as the “authority” based monetary policy that is a relic of the original banking system; Besides, it considers the special nature of the Chinese treasury bond market which is separated in two independent markets with very limited direct arbitrage opportunities between almost identical assets, and finally it incorporates the role of real estate, which played an essential role in China during the last decade. Our results show that different monetary policy shocks cause asymmetric effects on macroeconomic and financial variables.


Monetary policy, yield curve, market segmentation

El-Shagi, M.; Jiang. L.: Monetary policy transmission in China: Dual shocks with dual bond markets, in: Macroeconomic Dynamics (forthcoming)