From a Quantity to an Interest Rate-Based Framework: Multiple Monetary Policy Instruments and Their Effects in China*

In moving from a quantity to an interest rate-based policy framework, the PBoC uses a variety of monetary policy instruments and intermediate targets, which is different from central banks of main industrial countries. Contrary to most studies on overall effects of monetary policy, this research empirically investigates the effects of various types of monetary policy instruments separately by modeling the interactions and relationship among monetary policy instruments and other monetary variables such as monetary policy targets, to draw implications forhighlight the PBoC’s attempt to change the monetary policy framework to an interest rate based framework. Empirical results suggest the effects of the changes in benchmark lending rates and short-term interest rates on loan, M2 and output are larger than those of the changes in reserve requirement ratio, especially in recent years. Non-policy shocks exert substantial effects on intermediate targets, such as loans and M2, under a quantity-based policy framework. These results may imply that monetary policy is more effective under a new interest rate-based policy framework than the old quantity-based policy framework. Empirical results also suggest that the size and effects of short-term interest rate shocks are larger in recent years, which shows the push by the PBoC to move from a quantity-based policy framework to an interest rate-based policy framework has progressed significantly. In addition, short-term interest rates have the strongest effect on property price, among various policy instruments. This could suggest that the PBoC’s interest rate based framework is likely more effective in achieving its financial stability objective. Overall, the empirical results support the idea that the new interest rate-based policy framework is more effective in achieving not only traditional macroeconomic objectives, but also new financial stability objectives.