China's Monetary Policy and Its Transmission Mechanisms Before and After the Financial Tsunami

Since 2000 the Chinese economy has consistently maintained its rapid growth momentum. It has recently also experienced a high degree of volatility that is mainly due to overheating and shock absorbed from the 2008 global financial tsunami. In light of the economic instability derived from the financial tsunami, this article examines empirical evidence regarding the effectiveness of China's monetary policy to dampen the swing of economic cycles. Using the vector autoregression (VAR) model, it concludes that a traditional Keynesian interest-rate channel was China's major monetary transmission mechanism before the financial tsunami, but afterward it changed to an asset-price channel.