A Comparative Analysis of Different Tools of the People’s Bank of China in Effectiveness

We evaluate and compare the effects of a monetary policy shock implemented by one certain tool of the people’s bank of China ,say, open market operation, the required reserve ratio and interest rates, through constructing a mixed identification method that combines the pure sign restrictions method with some zero restrictions in a structural VAR model. We find, (i) a shock induced by open market sales or raising the required reserve ratio brings a stronger negative effect on real output, comparing with a shock induced by raising interest rate.(ii) a shock caused by raising interest rate has a bigger probability to bring price a persistent declining course. Our result implies the Chinese authority should give a priority to the instrument of interest rate when trying to tame inflation in the future.