The Cause of China Cash Crunch: Fundamental Economic Changes or Monetary Policy Shock?
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| Title | The Cause of China Cash Crunch: Fundamental Economic Changes or Monetary Policy Shock?
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| Author | Chen Hua |
| Organization | Shanghai Head office , People’s Bank of China |
| Email | chen.hua.walter@gmail.com |
| Key Words | Cash crunch, Minsky moment, Monetary policy, Affine non-arbitrage interest rate model, SVAR |
| Abstract | In July 2013, Cash crunch hits China interbank market with the liquidity suddenly exhausting and interest rate sharply rising. It highlights growing fear of financial systematic risk in China and was seen as a sign of China approaching Minsky moment. However, from an optimistic yet typical perspective, some people view the rate’s rising as a result of monetary policy shock. To explore the driving force behind China cash crunch, fundamental economic changes or monetary policy shock, this paper studies on the diverse economic shock’s effect on China interest rate term structure in terms of interest rate level, flattening and term premium, based on the affine non-arbitrage interest rate model combined with structural model, in which the economic shocks are identified as aggregate supply shock, aggregate demand shock and monetary policy shock. The evidence shows that China cash crunch is not caused by fundamental economic changes but rather could be ascribed to monetary policy shock. |
| Serial Number | WP675 |
| Time | 2014-08-29 |
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