Policy Regime Shifts In China

Abstract

Using an estimated DSGE model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy, I find that a passive monetary and passive fiscal policy regime fits Chinese economy best. However, if money is introduced in the economy, things would be different before and after 2012. Specifically, the active monetary and passive fiscal policy prevailed before 2012 and passive monetary and passive fiscal policy fitted after 2012 in China. Besides, government spending has different impact before and after 2012 according to the model.