Monetary policy shocks and the signaling channel of monetary policy in China

Abstract

This paper identifies exogenous monetary policy shocks based on the high frequency transaction data of China's interest rate swap market, and explores the ‘signaling channel’ of monetary policy by investigating the transmission of different monetary policy instruments on economic activities at both the macro and micro level. At the macro level, both the reserve ratio and the 7-day repo rate (R007) affect China's nonfinancial sectors and financial markets through the credit channel, while at the micro level, a rise in credit spread amplifies the impact of reserve ratio and R007 on corporate finance. There exists a signaling channel of monetary policy in China. The transmission and the signaling channel of China's monetary policy exhibit significant heterogeneity among enterprises with different ownerships, leverages and ages.