Essays in Macroeconomics Open Access

Xu, Tong (Spring 2018)

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This dissertation contains three chapters. The first chapter estimates three widely-used DSGE models for the Chinese economy. The structural estimation methodology allows us to analyze the business cycle behaviors for the Chinese economy. We find that (1) the standard Taylor rule as the monetary policy does not fit well with the Chinese data; (2) the spillovers between housing market and the real economy are more likely to work through the collateral constraints on the entrepreneur side rather than on the household side. The second chapter studies the optimal monetary policy in China in a unified theoretical and empirical framework. We build a simple New Keynesian model with asymmetric loss function for Central Bank, adaptive learning expectation, and targeted growth rate to derive the optimal monetary policy for China consistent with the empirical findings. Different from traditional stabilizing Taylor rule, the derived optimal monetary policy for China has a pro-growth feature and is endogenously regime-switching. We estimate the structural model with Chinese data and make inference on the preference of Central Bank from the estimation results. Also, we conduct several forecast exercises and find that the money growth rate has to grow in a relatively low speed in the long run to achieve a reasonable forecast for the output growth rate. The third chapter develops a model of financial intermediation in which the dynamic interaction between regulator supervision and banks’ loophole innovation generates credit cycles. Our model generates pro-cyclical bank leverage and asymmetric credit cycles. We show that a crisis is more likely to occur and the consequences are more severe after a longer boom. In addition, we investigate the welfare implications of a maximum leverage ratio in the environment of loophole innovation.


Table of Contents




1 Introduction                                                                                           1


1.1 Monetary Policy and Housing Market in China                                2


1.2 Optimal Monetary Policy in China                                                    4


1.3 Loophole Innovation and Supervision                                               7


2  DSGE Models for Chinese Economy                                                 12


2.1 Literature                                                                                          13


2.2 Data and Methodology                                                                     15


2.3 Smets-Wouters Model                                                                      17


2.4 Iacoviello-Neri Model                                                                      27


2.5 Liu-Wang-Zha Model                                                                       35


2.6 Discussion                                                                                         40


3  Optimal Monetary Policy in China                                                     42


3.1 Model                                                                                               43


3.2 Estimation                                                                                        54


3.3 Forecast                                                                                            62


4  A Model of Bank Credit Cycles                                                         69


4.1 Literature                                                                                         70


4.2 Static Model                                                                                     71


4.3 Dynamic Model                                                                               79


4.4 Regulation: Maximum Leverage Ratio                                            85


4.5 Learning about Loophole Innovation                                               89


4.6 Discussion                                                                                        97


5 Conclusion                                                                                          99


5.1 Summary for Monetary Policy and Housing Market in China       100


5.2 Summary for Optimal Monetary Policy in China                           101


5.3 Summary for A Model of Bank Credit Cycles                               101


Appendices                                                                                          103


A Smets-WoutersModel                                                                       104


B  Iacoviello-Neri Model                                                                     118


C  Liu-Wang-Zha Model                                                                      139


D  Proofs for A Model of Bank Credit Cycles                                      149


Bibliography                                                                                        153




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