Financial system reforms and China's monetary policy framework : A DSGE-based assessment of initiatives and proposals

Abstract

This paper evaluates various financial system reform initiatives and proposals in China in a DSGE modelling setting. The key reform steps analysed include phasing out benchmark interest rates, deepening the direct finance market, reducing government's quantity-based intervention on financial institutions. Our counterfactual model simulation results suggest that the reforms will be beneficial only, if Chinese monetary policy continues to rely on quantity-based interventions on financial institutions or tightens the interest rate rule. Keywords: DSGE model, financial sector reform, monetary policy, China. JEL classification: E42, E52, E58.