Is There Cross-Cycle Adjustment in China’s Monetary Policy?

Abstract To settle the theoretical and practical disputes over monetary policy cross-cycle adjustment, this paper explores the possible effects of China’s monetary policy cross-cycle adjustment based on empirical data. By using China’s macroeconomic data between the first quarter of 2000 and the fourth quarter of 2021, we use the HP filtering method to measure the trend of economic cyclical volatility, the three-stage SETAR model and the trend mutation point identification method to identify two types of cycles, respectively, and the FAVAR model to make empirical judgments on the effectiveness of monetary policy cross-cycle adjustment. We have the following research findings. First, monetary policy has certain cross-cycle adjustment effects on aggregate output, but has quite strong state dependence. Second, monetary policy has no cross-cycle adjustment effects on industrial output. Third, the higher the economic uncertainties, the worse the monetary policy cross-cycle adjustment effects, which, however, can be increased by intensifying monetary policy regulation. Fourth, in the economic recession stage, quantity-based monetary policy has advantage over price-based monetary policy in cross-cycle adjustments, while both of the above policies have no cross-cycle adjustment in the economic growth stage. Fifth, policy expectation plays an important role in cross-cycle adjustment, and reinforcing expectations is the key to realizing cross-cycle adjustment.