Influence of the Chinese monetary policy on the current macro-economy — Analysis with the FAVAR model

Facing the over-heating economy and inflation and so on, the Chinese government has taken frequent monetary policy in 2010 to resolve these problems. To fully understand the effects of these policies, this paper adopts the FAVAR model to analyze the relations between the interest rate, deposit reserve and the ten principal components of the Chinese macro-economic data. Findings indicate that these policies will not pay off obviously in the long run to slow down the over-heating economy, to prevent excessive fix capital investment, and to rid over-liquidity and inflation.