## Section 6 — Monetary policy transmission: local projection estimates, coordination with fiscal policy, and SVAR findings

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### Monetary policy framework and institutional context
- Multiple objectives, targets, and instruments characterize China’s monetary policy framework; lack of clarity remains on the nominal anchor (intermediate target).
- The previous official intermediate target, M2 growth, was de-emphasized in 2017 but has not been formally replaced.
- The PBC began treating the 7-day interbank repo rate (DR007) as the de facto target rate around the same time.
- Improvements to the loan prime rate (LPR) regime in mid-2019 elevated the importance of the MLF rate, making it the main medium-term policy rate.
- The PBC’s main short-term policy rate previously was the PBC 7-day reverse repo rate (with DR007 as its target).
- Institutional decision-making:
  - The State Council (SC) is the decision-making body; the PBC does not have full operational (instrument) independence.
  - From Article 5 of the PBC Law: “The People’s Bank of China shall report its decisions to the State Council for approval concerning the annual money supply, interest rates, foreign exchange rates and other important matters specified by the State Council before they are implemented.”
  - The PBC’s monetary policy committee is consultative, meets quarterly, does not pre-announce meeting dates, and usually issues a press release a few days after meetings.
  - China’s 13th SC consists of 35 members; the Standing Committee of the SC consists of 10 members. The whole SC meets biannually or on an ad hoc basis; the Standing Committee meets weekly.

### Data sources, monetary shock construction, and validation
- Data sources:
  - Interest rate swaps: rates, nominal principal, and number of deals from Bloomberg.
  - Precise timestamps of monetary policy events hand-collected from PBC’s website.
  - State Council weekly meeting and Premier news texts scraped from SC website.
  - Financial data and macro variables from CEIC.
  - Bond spreads for LGFVs, enterprise bonds, corporate bonds, medium term notes, and commercial paper constructed as differences between yield and treasury yield of matching maturities.
  - Two IMF-constructed series: economic activity tracker and augmented general government debt (includes estimated off-budget investment spending).
- Monetary shock measure:
  - Unexpected component measured as the daily close-to-close change in the rate on one-year interest rate swaps (IRS) based on the interbank 7-day repo rate, around policy announcement dates.
  - One-year maturity chosen because one-year and five-year swaps on the 7-day repo are the most liquid and the one-year horizon matches expected policy-effect horizon.
- Main monetary policy instruments tracked (2008 onwards):
  - (i) reserve requirement ratio (RRR);
  - (ii) PBC’s 7-day reverse repo rate;
  - (iii) benchmark deposit and lending rates (LDR);
  - (iv) rate on the PBC’s medium-term lending facility (MLF).
- Broad monetary shock measure includes timing of:
  - (v) quarterly releases of monetary policy reports,
  - (vi) foreign exchange policy reforms,
  - (vii) recent changes to the MLF (eligible collateral and targeted lending facility).
- Validation and summary statistics:
  - Table 2: 1-year IRS based on 7-day repo is the most liquid by nominal principal traded.
  - Minute-by-minute IRS snapshots for 2020 announcements show market reaction on the PBC announcement date; daily measure sufficient to capture surprise.
  - Summary statistics (daily measure):
    - Average absolute changes in IRS rates on days with policy events: 5 basis points — 2 basis points higher than on days without policy events.
    - Standard deviation of IRS changes during event days: 8 percent — 3 percent higher than in non-event days.
  - Figures described indicate monetary policy has generally been countercyclical and IRS changes provide a continuous measure when instruments change in fixed increments.

### Text-based measures and topic modeling for monetary–fiscal coordination
- Text sources and scope:
  - SC website sections used: weekly SC meetings (937 releases) and “Premier News” (4883 releases).
- Topic modeling:
  - Latent Dirichlet allocation (LDA) used to cluster words in SC meeting releases into topics.
  - Topic 5 and topic 12 represent monetary policy and fiscal policy, motivating use of SC releases to construct a coordination measure.
- Coordination measures:
  - Text-based: monetary policy shocks sorted into coordinated and uncoordinated by quarter using joint fiscal and monetary keywords.
  - Intensity-based cross-check: considered coordinated when multiple monetary instruments are changed within a two-week span; results similar to text-based measure.
- Two main types of coordination identified in SC releases:
  - Joint measures focused on micro and small enterprises.
  - Accommodative monetary policy to provide supportive conditions for fiscal stimulus.

### Empirical approach
- Local projections (Jordà 2005):
  - Used to estimate effects of monetary policy shocks on various interest rates and to compare coordinated versus uncoordinated shocks.
  - Monetary shocks signs inverted so positive shock corresponds to monetary expansion.
  - Separate projections for coordinated and uncoordinated shocks include interactions with output gap and inflation.
  - Impulse responses reported with 90 percent confidence intervals; H = 30 days.
- External-instrument Structural VAR (Mertens and Ravn 2013; Gertler and Karadi 2015):
  - High-frequency IRS-based shock series used as external instrument Z_t.
  - Identifying assumptions: E[u_t ε^p_t′] = φ ≠ 0 and E[Z_t ε^q_t′] = 0.
  - Baseline VAR: 6-variable system including RRR, inflation, output, government debt (augmented), interbank funding costs, and benchmark lending rate with RRR instrumented by IRS-based shock.

### Local projection results — transmission to interest rates (key quantitative findings)
- On impact (h = 0):
  - Immediate impact on sovereign bond yields and state-owned enterprise bond spreads; less impact on corporate bond spreads and other credit bond spreads.
  - Specific estimates:
    - A shock accompanied by a 100 bps decrease in the IRS rate is associated with about a 15-30 bps decrease in sovereign yields.
    - The same shock is associated with about a 15-25 bps decrease in enterprise bond spreads.
- Peak and maturity-specific effects to a 1 percentage point expansionary monetary policy shock:
  - Interbank market:
    - 3-month SHIBOR: peak effect of a 1.8 percentage point reduction.
    - 7-day repo rate: peak response of a 2.4 percentage point reduction.
  - Sovereign yields:
    - Strong and persistent effects across 1-, 3-, 5-, and 10-year maturities.
  - Enterprise bond spreads:
    - Strongest effect on 5-year bond spreads: at peak, a 1 percentage point expansionary shock reduces the 5-year enterprise bond spread by 0.6 percentage points.
    - Average responses for 1-, 3-, and 10-year maturities initially significant but die out after a few days.
  - Corporate bond spreads:
    - Significant effects on 1-, 3-, and 5-year corporate spreads; 1-year significance dies out after about two weeks.
  - Medium-term notes and commercial paper:
    - Interest rate spreads on medium-term notes and commercial paper are not affected on average (responses not statistically significantly different from zero).
    - Commercial paper responses reported by ratings AAA, AA+, AA, and AA-.

### Differential effects — coordinated versus uncoordinated monetary policy
- Overall:
  - Impact of monetary policy is significantly stronger when coordinated with fiscal policy; coordinated shocks are larger and more persistent in most cases.
- Interbank market:
  - Coordinated shocks generate both a stronger and more persistent effect on interbank funding costs compared to uncoordinated shocks.
- Sovereign yields:
  - Persistent effects on sovereign yields are driven by coordinated shocks. Both coordinated and uncoordinated shocks pass through initially, but the effect of uncoordinated shocks reverses after about 5 days while coordinated effects remain.
- Enterprise and LGFV spreads:
  - Response to coordinated shocks is significant and persistent. Example: the 1-year enterprise spread decreases by around 3 percentage points at peak in response to a 1 percentage point monetary expansion coordinated with fiscal expansion.
- Corporate spreads:
  - Significant impact is conditional on fiscal policy moving in the same direction. Example: coordinated shocks reduce 1-year corporate spreads by 3 percentage points 20 days after the shock.
- Medium-term notes and commercial paper:
  - Coordinated monetary policy has some effect: short-lived effects on 3-year medium-term notes and more persistent effects on 1-year commercial paper.

### External-instrument SVAR — aggregate effects
- VAR setup:
  - Monthly VAR using RRR as primary monetary policy variable, instrumented with IRS-based shock.
  - Monthly aggregation: sum of shocks for aggregate monetary policy shocks; monthly average of interest rates.
- Impulse response to a one standard deviation expansionary monetary policy shock:
  - The shock corresponds to a RRR cut of roughly 25 basis points.
  - Responses:
    - Interbank funding rate and benchmark lending rate decrease.
    - Government debt rises after the monetary shock (consistent with frequent monetary-fiscal coordination).
    - Output rises in response to the expansionary shock; effects persist for 12 months, reaching a peak response of over 0.2 percent 5 months after the shock.
  - Aggregate SVAR evidence is suggestive that monetary policy has effects on the macroeconomy after accounting for fiscal policy effects.

### Conclusion — key findings, policy implications, and institutional considerations
- Key findings:
  - Evidence that monetary policy affects interest rates, consistent with recent studies.
  - Average response to all monetary policy shocks:
    - Significant and persistent pass-through to interbank interest rates.
    - Significant and persistent pass-through to sovereign yields.
    - Significant and persistent pass-through to corporate spreads.
    - Transmission to enterprise and LGFV spreads is mixed, with pass-through only for some maturities.
    - No significant effects on commercial paper and medium-term note spreads.
  - Distinguishing coordinated versus uncoordinated measures:
    - Impact of coordinated monetary measures is significantly stronger and persistent compared with uncoordinated measures.
    - Muted market response to uncoordinated monetary policy weakens monetary authority’s ability to affect the economy via standard interest-rate channels.
  - Collective decision making around macroeconomic policy means monetary and fiscal policy often work in tandem to counter shocks; coordination can be beneficial in certain circumstances, but monetary policy needs ability to respond quickly and independently.
- Policy implications and recommendations:
  - Formulate a clear inflation objective and grant the PBC operational (instrument) independence.
    - Have the SC set overall goals for monetary policy (but not specific interest rate targets) and delegate responsibility to the PBC to:
      - Ensure multiple stakeholders are not steering policies towards different objectives at different times.
      - Limit fiscal dominance (large, augmented deficits and resulting pressures for credit expansion) in non-crisis periods.
  - Streamline and clarify the monetary policy framework, with focus on one key policy interest rate.
    - The PBC should guide the short-term interbank rate in the clearest manner possible.
    - Let longer-term rates be market-determined, reflecting expectations of the central bank’s future policy rates and future inflation.
    - A clearer policy framework will make it easier for the market to establish a yield curve.
  - Continue reforms to improve interest rate pass-through.
    - Include continued progress on LPR reform and phasing out the benchmark deposit rate.
  - Increase the financial robustness of the banking system to fluctuations in short-term interest rates.
    - Raise bank capital.
    - Further develop interest-rate hedging instruments.
- Institutional consideration:
  - Tension exists between coordinated macroeconomic policy and the need for monetary policy independence; historically “many government agencies and stakeholders will attempt to steer monetary policies in their favor through the SC, often leading to pressures for excessive monetary expansion and a rising leverage ratio in the economy.”

*Source: wpiea2022074-print-pdf — IMF Working Paper excerpt (Section 6 and Conclusion).*

### section 6, starting with the local projection estimates of  monetary transmission to various interest

### Section 6 — Monetary policy transmission: local projection estimates, coordination with fiscal policy, and SVAR findings

### Monetary policy framework and institutional context
- Multiple objectives, targets, and instruments characterize China’s monetary policy framework; lack of clarity remains on the nominal anchor (intermediate target).
- The previous official intermediate target, M2 growth, was de-emphasized in 2017 but has not been formally replaced.
- The PBC began treating the 7-day interbank repo rate (DR007) as the de facto target rate around the same time.
- Improvements to the loan prime rate (LPR) regime introduced in mid-2019 elevated the importance of the MLF rate, making it the main medium-term policy rate.
- The PBC’s main short-term policy rate previously was the PBC 7-day reverse repo rate (with DR007 as its target).
- Institutional decision-making:
  - The State Council (SC) is the decision-making body; the PBC does not have full operational (instrument) independence.
  - From Article 5 of the PBC Law: “The People’s Bank of China shall report its decisions to the State Council for approval concerning the annual money supply, interest rates, foreign exchange rates and other important matters specified by the State Council before they are implemented.”
  - The PBC’s monetary policy committee is consultative, meets quarterly, does not pre-announce meeting dates, and usually issues a press release a few days after meetings.
  - China’s 13th SC consists of 35 members; the Standing Committee of the SC consists of 10 members. The whole SC meets biannually or on an ad hoc basis; the Standing Committee meets weekly.

### Related literature and empirical context
- Methodological placement: the paper uses a high-frequency approach and financial market information to identify monetary policy shocks (following Cook and Hahn 1989; Kuttner 2001; Gürkaynak, Sack and Swanson 2004).
- Two strands of China-focused literature:
  - Earlier studies: measure monetary stance and how remnants of regulated interest-rate era weaken transmission (e.g., role of loan-to-deposit ratio, quantitative loan limits, high RRR, soft budget constraints, regulatory arbitrage by shadow banks).
  - More recent studies: compare effects of different policy instruments and seek evidence of an interest-rate channel after liberalization.
- Key empirical findings from the literature cited:
  - Market rates responded historically to changes in the policy benchmark deposit rate and RRR, but not to open market operations.
  - Deposit rate liberalization is necessary for a short-term policy interest rate to be effective in passing through to short-term interbank rates and beyond.
  - After deregulation of deposit and lending rates (complete in 2015) and the PBC’s interest rate corridor, studies find interest-rate changes have substantial effects on economic activity and inflation, and policy surprises have persistent effects on interest rates and reduce inflation and activity.
  - Counterarguments note remaining institutional constraints on forward guidance and difficulties in characterizing stance due to many instruments.

### Data sources and construction of monetary shocks
- Data sources:
  - Interest rate swaps: rates, nominal principal, and number of deals from Bloomberg.
  - Precise timestamps of monetary policy events hand-collected from PBC’s website.
  - State Council (SC) weekly meeting and Premier news texts scraped from SC website.
  - Financial data (sovereign yields, bond yields, policy rates, interbank funding costs) and macro variables (inflation, M2) from CEIC.
  - Bond spreads for LGFVs, enterprise bonds, corporate bonds, medium term notes, and commercial paper constructed as differences between yield and treasury yield of matching maturities.
  - Two IMF-constructed series: economic activity tracker and economic-based “augmented” definition of the general government debt (includes estimated off-budget investment spending).
- Monetary shock measure methodology:
  - Unexpected component measured as the daily close-to-close change in the rate on one-year interest rate swaps (IRS) based on the interbank 7-day repo rate, around policy announcement dates.
  - Rationale: captures the “surprise” and is comparable across instruments; one-year maturity chosen because one-year and five-year swaps on the 7-day repo are the most liquid and the one-year horizon matches expected policy-effect horizon.
- Main monetary policy instruments tracked (2008 onwards):
  - (i) reserve requirement ratio (RRR) — share of banks’ deposit kept in reserve with the PBC, including broad-based and targeted changes,
  - (ii) PBC’s 7-day reverse repo rate — policy rate at the center of the interest rate corridor,
  - (iii) benchmark deposit and lending rates (LDR) — not changed since 2015 and being phased out,
  - (iv) rate on the PBC’s medium-term lending facility (MLF) — main instrument to influence bank lending rates since mid-2019.
- Broad monetary shock measure (to capture wider stance changes) includes timing of:
  - (v) quarterly releases of monetary policy reports,
  - (vi) foreign exchange policy reforms,
  - (vii) recent changes to the MLF (changes to eligible collateral and establishment of a targeted lending facility).
- Justification for including broader items:
  - Monetary policy reports are included in the broad measure (not the main measure) because the PBC’s monetary policy committee is consultative.
  - FX policy reforms matter because the renminbi is still carefully managed.
  - Adjustments to MLF collateral and targeted MLFs affect lending available via the facility and thus the stance.

### Validation, robustness, and summary statistics of the surprise measure
- Chosen IRS series liquidity:
  - Table 2 indicates the 1-year IRS based on 7-day repo is the most liquid by nominal principal traded — preferred measure.
  - The 5-year IRS based on 7-day repo has under half of the nominal principal traded but the highest number of deals traded — used for robustness checks.
- High-frequency validation:
  - Minute-by-minute IRS snapshots from Bloomberg for 2020 announcements (example: April 4, 2020 RRR cut and IOER decision) show market reaction on the PBC announcement date; daily measure is sufficient to capture market movements attributable to policy surprises.
- Summary statistics (daily measure):
  - Average absolute changes in IRS rates on days with policy events: 5 basis points — 2 basis points higher than on days without policy events.
  - Standard deviation of IRS changes during event days: 8 percent — 3 percent higher than in non-event days.
- Figure evidence:
  - Figure 2 (described) shows monetary policy has generally been countercyclical, with expansionary shocks in downturns and contractionary shocks in expansions.
  - Figure 3 (described) shows IRS and monetary instruments move in the same direction; IRS changes provide a continuous measure even when instrument changes occur in fixed increments (e.g., 25 basis points for the RRR).

### Monetary–fiscal coordination: text-based measure
- Approach:
  - Dictionary-based frequency searches of the English texts of State Council (SC) news releases (online archive begins May 2013; sample from May 2013 to April [text truncated in source]).
  - SC news releases chosen because SC is China’s macroeconomic policy decision-making body and its news releases are a timely source of information on monetary and fiscal policies.

*IMF Working Paper — Section 6 content as provided in the supplied excerpt.*

### 2020. We include two sections from the SC website: the weekly SC meetings, which consists of

### wpiea2022074-print-pdf - 2020

### Data and topic modeling
- The State Council (SC) website sections used: the weekly SC meetings (937 releases) and the “Premier News” section (4883 releases).
- Text analysis method: latent Dirichlet allocation (LDA) is used to cluster words in SC meeting releases into related topics.
- Results from topic analysis:
  - Each LDA topic is represented by a row in Figure 5; darkness of a cell denotes the likelihood of a word to appear in that topic.
  - Figure 6 highlights selected topics and policy priorities from State Council meetings.
  - Notably, topic 5 and topic 12 represent monetary policy and fiscal policy, motivating the use of SC releases to construct a measure of monetary-fiscal coordination.

### Measures of monetary-fiscal coordination
- Two main types of monetary-fiscal coordination identified from SC releases:
  - Joint measures focused on micro and small enterprises.
  - Accommodative monetary policy to provide supportive conditions for fiscal stimulus.
- Text-based coordination classification:
  - Monetary policy shocks are sorted into coordinated and uncoordinated by quarter using joint fiscal and monetary keywords (see Table 4).
  - Uncoordinated and coordinated monetary policy shocks are similar in size (see Table 5).
- Intensity-based coordination cross-check:
  - Monetary policy measures are also considered coordinated when multiple monetary instruments are changed within a two-week span.
  - This intensity measure is used to study stronger monetary pushes and to cross-check the text-based coordination measure; results (not shown) are similar to the text-based measure.

### Institutional and market context (selected facts)
- China’s SC provides high-quality official English translations of all news releases.
- Structure of China’s credit bond market:
  - Enterprise bonds: launched in 1982; make up about 8 percent of the bond market; 80 percent of enterprise bonds have been issued by local government financial vehicles (LGFVs).
  - Corporate bonds: issued since 2007; account for 5 percent of the market.
  - Medium-term notes: 7 percent of the market.
  - Commercial paper: 2 percent of the market.

### Empirical models
- Local projections (Jordà 2005) used to estimate effects of monetary policy shocks on various interest rates and to compare coordinated versus uncoordinated shocks.
  - Baseline average-response equation (impact and horizons h = 0, 1, 2, ..., H); monetary shocks signs inverted so positive shock corresponds to monetary expansion.
  - Separate local projections for coordinated and uncoordinated shocks include interaction terms (monetary shock × output gap and monetary shock × inflation) to allow state-dependent effects.
  - Impulse responses reported with 90 percent confidence intervals; H = 30 days for each impulse response.
- External-instrument Structural VAR (Mertens and Ravn 2013; Gertler and Karadi 2015) used to study macroeconomic response to monetary policy and coordination.
  - High-frequency IRS-based monetary policy shock series is used as the external instrument Z_t to identify structural monetary shocks.
  - Identifying assumptions:
    - E[u_t ε^p_t′] = φ ≠ 0
    - E[Z_t ε^q_t′] = 0
  - Baseline VAR: 6-variable system including RRR, inflation, output, government debt (augmented government debt as ratio of nominal GDP), interbank funding costs, and benchmark lending rate. RRR is the main monetary policy variable instrumented with the IRS-based shock.

### Results — Local projections: transmission to interest rates
- On impact (h = 0):
  - Monetary policy shocks have an immediate impact on sovereign bond yields and state-owned enterprise bond spreads, but less impact on corporate bond spreads and other credit bond spreads.
  - Specific estimates:
    - A shock accompanied by a 100 bps decrease in the IRS rate is associated with about a 15-30 bps decrease in sovereign yields.
    - The same monetary policy shock is associated with about a 15-25 bps decrease in enterprise bond spreads.
- Dynamic cumulative impulse responses to a 1 percentage point expansionary monetary policy shock (solid black line), and differential responses for coordinated (dashed red) and uncoordinated (dotted blue) shocks; 90 percent confidence intervals reported.
- Key quantitative transmission findings:
  - Interbank market:
    - 3-month SHIBOR: peak effect of a 1.8 percentage point reduction in response to a 1 percentage point expansionary shock.
    - 7-day repo rate: peak response of a 2.4 percentage point reduction.
  - Sovereign yields:
    - Strong and persistent effects across 1-, 3-, 5-, and 10-year maturities.
  - Enterprise bond spreads:
    - Strongest effect on 5-year bond spreads: at peak, a 1 percentage point expansionary shock reduces the 5-year enterprise bond spread by 0.6 percentage points.
    - Average responses for 1-, 3-, and 10-year maturities are initially statistically significant but die out after a few days.
  - Corporate bond spreads:
    - Significant effects on 1-, 3-, and 5-year corporate spreads; 1-year significance dies out after about two weeks, but other maturities remain significant longer.
  - Medium-term notes and commercial paper:
    - Interest rate spreads on medium-term notes and commercial paper are not affected by monetary policy on average (responses not statistically significantly different from zero).
    - Commercial paper responses reported by ratings AAA, AA+, AA, and AA-.

### Results — Differential effects: coordinated vs uncoordinated monetary policy
- Overall: impact of monetary policy is significantly stronger when coordinated with fiscal policy; coordinated shocks are larger and more persistent in most cases.
- Specific differential effects:
  - Interbank market:
    - Coordinated shocks generate both a stronger and more persistent effect on interbank funding costs compared to uncoordinated shocks.
  - Sovereign yields:
    - Persistent effects on sovereign yields are driven by coordinated shocks. Both coordinated and uncoordinated shocks pass through initially, but the effect of uncoordinated shocks reverses after about 5 days while coordinated effects remain.
  - Enterprise and LGFV spreads:
    - Response to coordinated shocks is significant and persistent. Example: the 1-year enterprise spread decreases by around 3 percentage points at peak in response to a 1 percentage point monetary expansion that is coordinated with fiscal expansion.
  - Corporate spreads:
    - Significant impact is conditional on fiscal policy moving in the same direction. Example: coordinated shocks reduce 1-year corporate spreads by 3 percentage points 20 days after the shock.
  - Medium-term notes and commercial paper:
    - Coordinated monetary policy has some effect: short-lived effects on 3-year medium-term notes and more persistent effects on 1-year commercial paper.

### Results — External-instrument SVAR: aggregate effects
- VAR setup and frequency:
  - Monthly VAR using RRR as primary monetary policy variable, instrumented with IRS-based shock.
  - Aggregation: monthly sum of shocks for aggregate monetary policy shocks; monthly average of interest rates.
- Impulse response to a one standard deviation expansionary monetary policy shock:
  - The shock corresponds to a RRR cut of roughly 25 basis points.
  - Responses:
    - Interbank funding rate and benchmark lending rate decrease.
    - Government debt rises after the monetary shock (consistent with frequent monetary-fiscal coordination).
    - Output rises in response to the expansionary shock; effects persist for 12 months, reaching a peak response of over 0.2 percent 5 months after the shock.
  - Aggregate SVAR evidence is suggestive that monetary policy has effects on the macroeconomy after accounting for fiscal policy effects.

*Source: wpiea2022074-print-pdf - 2020 (IMF Working Paper excerpt provided).*

### 7.   Conclusion

### 7.   Conclusion

### Key findings
- Evidence that monetary policy affects interest rates, consistent with recent studies.
- Considering the average response to all monetary policy shocks (both coordinated and uncoordinated):
  - Significant and persistent pass-through to interbank interest rates.
  - Significant and persistent pass-through to sovereign yields.
  - Significant and persistent pass-through to corporate spreads.
  - Transmission to enterprise and LGFV spreads is mixed, with evidence of pass-through only for some maturities.
  - No significant effects on commercial paper and medium-term note spreads.
- When distinguishing coordinated versus uncoordinated measures:
  - The impact of coordinated monetary measures is significantly stronger than that of uncoordinated measures, and also persistent.
  - A muted market response to uncoordinated monetary policy weakens the ability of the monetary authority to use its tools to affect the economy, particularly through standard interest-rate channels.
- Given collective decision making around macroeconomic policy, monetary and fiscal policy often work in tandem to counter economic shocks; coordination can be beneficial in certain circumstances, but monetary policy needs the ability to respond quickly and independently to economic events.

### Policy implications and recommendations
- Formulate a clear inflation objective and grant the PBC operational (instrument) independence.
  - Have the SC set the overall goals for monetary policy (but not specific interest rate targets) and delegate the responsibility to meet them to the PBC to:
    - Ensure multiple stakeholders are not steering policies towards different objectives at different times.
    - Limit fiscal dominance (large, augmented deficits and resulting pressures for credit expansion) in non-crisis periods.
- Streamline and clarify the monetary policy framework, with a focus on one key policy interest rate.
  - The PBC should guide the short-term interbank rate in the clearest manner possible.
  - Let longer-term rates be market-determined, reflecting expectations of the central bank’s future policy rates and future inflation, among other factors.
  - A clearer policy framework will make it easier for the market to establish a yield curve.
- Continue reforms to improve interest rate pass-through.
  - Include continued progress on LPR reform and phasing out the benchmark deposit rate (Hoyle and Jeasakul 2020).
- Increase the financial robustness of the banking system to fluctuations in short-term interest rates.
  - Raise bank capital.
  - Further develop interest-rate hedging instruments.

### Institutional considerations
- The paper highlights the tension between coordinated macroeconomic policy and the need for monetary policy independence. As noted in footnote 11:
  - Ma (2 0 20) suggests that historically “many government agencies and stakeholders will attempt to steer monetary policies in their favor through the SC, often leading to pressures for excessive monetary expansion and a rising leverage ratio in the economy.”

*IMF Working Paper — Monetary Policy Transmission and Policy Coordination in China, Working Paper No. WP/2022/074*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022074-print-pdf.pdf_