Regional effects of China’s monetary policy during the economic transition period: Based on China’s city classification system under the new normal

by Lingyu Tang, Guoju Ai, Zushun Cai

We analyse the regional effects of China’s monetary policy during the economic transition period based on the city classification system under the New Normal. Using panel vector autoregressive (PVAR) models, we examine the differences in the influence of a unified monetary policy on four types of Chinese cities: first-tier, quasi-first-tier, second-tier, and third-tier cities, from perspective of economic output. Based on a comparative analysis of the results of impulse response function and variance decomposition, we conclude that whether for quantitative monetary policy or price-based monetary policy, the degree to which economic growth responds to the unified monetary policy varies across the four types of cities in the short and long terms. With reference to China’s economic transition under the New Normal, in the short term, this phenomenon probably relate to the varying degrees of financial marketization among the four city types; in the long run, this phenomenon may be attributed to the difference in the progress of industrial upgrading of these urban areas. Based on the analysis above, we suggest policy implications for Chinese cities based on the structural monetary policy, industrial upgrading, and market-oriented financial sector reforms.